Annual Report for Fiscal Year Ending December 31, 2024 (Form 10-K)

Management's Discussion and Analysis of Financial Condition and Results of Operation.

The following Management's Discussion and Analysis should be read in conjunction with our financial statements and the related notes thereto included elsewhere herein. The Management's Discussion and Analysis ("MD&A") contains forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. Any statements that are not statements of historical fact are forward-looking statements. When used, the words "believe," "plan," "intend," "anticipate," "target," "estimate," "expect," and the like, and/or future-tense or conditional constructions ("will," "may," "could," "should," etc.), or similar expressions, identify certain of these forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause actual results or events to differ materially from those expressed or implied by the forward-looking statements in this form. Our actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of several factors.

Historical results may not indicate future performance. Our forward-looking statements reflect our current views about future events, are based on assumptions and are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those contemplated by these statements. We undertake no obligation to publicly update or revise any forward-looking statements, including any changes that might result from any facts, events, or circumstances after the date hereof that may bear upon forward-looking statements. Furthermore, we cannot guarantee future results, events, levels of activity, performance, or achievements. Unless otherwise indicated or the context otherwise requires, references in this section to "we," "us," "our," and other similar terms refer to Nature's Miracle Holding Inc. and its consolidated subsidiaries and VIE.

Reverse recapitalization

Nature's Miracle Holding Inc., which until March 11, 2024 was known as LBBB Merger Corp. (the "Company", "we" or "us") is a company incorporated on August 1, 2022 under Delaware law as a wholly owned subsidiary of the Lakeshore Acquisition II Corp., a Cayman Islands exempted company ("Lakeshore").

Lakeshore entered into the Merger Agreement with Nature's Miracle Inc. ("Nature's Miracle") and shareholders of Nature's Miracle and Lakeshore on September 9, 2022, and as amended on June 7, 2023. Pursuant to the terms of the Merger Agreement, the merger will be completed through a two-step process consisting of the reincorporation and the merger. Pursuant to the Merger Agreement, at the effective time of the merger, each share of Nature's Miracle common stock issued and outstanding immediately prior to the effective time was cancelled and automatically converted into the right to receive the applicable pro rata portion of shares of our common stock, the aggregate value of which was equal to: (a) $230,000,000 minus (b) the estimated Closing Net Indebtedness (as defined in the Merger Agreement) (the "Merger Consideration").

On March 11, 2024, Lakeshore merged with and into the Company for the sole purpose of reincorporating Lakeshore into the State of Delaware ("Reincorporation"). Immediately after the Reincorporation, we consummated the merger resulting in the stockholders of Nature's Miracle becoming 84.7% stockholders of our Company and our Company becoming the 100% stockholder of Nature's Miracle. Immediately after giving effect to the merger, there were 26,306,764 issued and outstanding shares of our common stock. The consolidation of our Company and our subsidiaries have been accounted for as Lakeshore is the "acquired" company for financial reporting purposes at historical cost and prepared on the basis as if the aforementioned transactions had become effective as of the beginning of the first period presented in the accompanying consolidated financial statements. All share and per share data has been retroactively restated to reflect our current capital structure.

Reverse Split

On November 18, 2024, the Company filed a certificate of amendment to its amended and restated certificate of incorporation to effect a one-for-thirty (1-for-30) reverse split (the "Reverse Split"). The Reverse Split became effective on November 21, 2024. As a result of the Reverse Split, every 30 shares of the Company's issued and outstanding common stock were automatically converted into one share of common stock, with no change to the par value per share. All share and per share data has been retroactively restated to reflect the current capital structure and the Reverse Split of the Company.

Overview

We are a growing agriculture technology company providing products to indoor growers in a CEA (Controlled Environment Agriculture) setting in North America. Our main products are commercial grade LED lights and related equipment designed for indoor growers. For over 10 years, the Company has utilized manufacturing relationships in China to provide quality and cost-efficient products in this space. In the 4^th quarter 2024, we renamed a subsidiary to Hydroman Electric Inc. for the purpose of entering electric vehicle ("EV") market as we aim to distribute EV medium sized trucks to customers in Latin America and also develop indoor growing systems within these EV trucks. In 2024, the Company also started investments in Future Tech Inc., a Bitcoin mining and data center business.

We focus on the greenhouse and cultivation industry and aim at providing integrated greenhouse solutions, including grow lights, dehumidifiers, coco and grow media for vertical farming and multiple growing system. These systems enable year-round cultivation of crops, avoids harsh environments with very cold or hot climate. Many states focused on farming are limited to grow crops are certain months such as Spring to Fall only, and or are too far from production states too have fresh produce year-round. There are cost advantages also as vertical farming systems produces a much higher yield per acre of land. In most cases, water consumption is much lower, up to 90%. Many indoor growers can locate closer to large population centers which can significantly reduce cost of trucking, and lead time whilst reducing carbon emissions as well.

In February 2024 the Company started shipping a new product line of grow containers. These systems are indoor vertical farming units inside a traditional shipping container but equipped with temperature controls, multiple layers of growing space, L.E.D. lights, water controls and other systems. The Company has branded these "Growtainers" and "5 plus 1" representing five grow containers plus one container used as a control unit.

We operate mainly through two subsidiaries in California, Visiontech and Hydroman. Visiontech is known for the brand "eFinity" and provides high-efficiency and high-quality grow lights, grow media, fixtures and other related equipment; Hydroman supplies commercial greenhouse developers and owners with professional lighting technology and equipment. On November 11, 2024, Hydroman, Inc. changed its name to Hydroman Electric Corporation and will focus on business of electric vehicles distribution.

In its first expansion plan, the Company has added additional products to our offering. These include organic and non-organic fertilizers, organic plant growth additives, and dehumidifiers. We have diverse suppliers including from countries such as India, Holland and Turkey. Additional equipment is being considered as well. These are value add components that will help growers increase yield, but more importantly reduce failures and dramatically improve growing environments such. The new products are a natural complement to its our base of LED grow lights.

The Company also seeks to enter the joint ventures in other industry verticals to utilize excess space available for vertical farming.

Trends and Expectations

The following factors have been important to our business, and we expect them to impact our results of operations and financial condition in future periods:

Product and Brand Development

We plan to increase investments in product and brand development. We actively evaluate and pursue acquisitions of product brand names and improvements on existing products. We continue to work with our suppliers in improving lighting products to be both of the highest quality and simultaneously cost effective for the customer. The Company invests in trips abroad to source and partner with manufacturing companies. We expect to develop additional manufacturing relationships and suppliers in Europe in the near future.

The Company is also developing proprietary "all in one" automated and robotic indoor growing systems that are under design and testing phases.

The Company utilizes its vast network in the industry and recent publicity in listing on Nasdaq in acquiring leads for potential partnerships in sourcing, research and development of new product and business acquisitions.

Regulatory Environment

The importation of LED lighting and distribution of such equipment in the United States and Canada does not require strict government disclosures and technical inspections. The Company obtains local business permits to store in our main warehouses, obtain licenses to resell, and follows guidelines on packaging. Certain utility companies in the U.S. have programs that award rebates to heavy usage customers, some of which are in the indoor farming business. These customers are required to install LED lights with a minimum 50,000 hours life. There is also a performance requirement set by DesignLights Consortium, a non-profit energy improvement agency.

Sourcing

The Company has long-term relationships with suppliers in Asia. Our top three suppliers of LED equipment are American Agricultural Innovation Technology Inc., Solislike-Tech Co., Ltd., Dongguan ZSC Lighting Co., Ltd. Each supplier provides us net 30 to net 90-day terms. The Company has also been approached by established lighting companies based in Japan and Germany. On grow feed, fertilizers and nutrients, our potential suppliers are based in Europe and some in Asia. Our grow container product was jointly developed and manufactured by a company based in Shenzhen, China.

On April 24, 2023, we entered into a strategic cooperation agreement with Sinoinnovo Technology (Guangdong) Co., Ltd. ("Sinoinnovo"), a company incorporated under the laws of China, pursuant to which Nature's Mircle will source from Sinoinnovo its grow light systems for distribution in the U.S. and Europe. Both companies will also cooperate jointly to set up advanced manufacturing capabilities in China and the U.S.

RESULTS OF OPERATIONS

For the years ended December 31, 2024 and 2023

The following table presents certain combined statement of operations information and presentation of that data as a percentage of change from year to year.

		Year Ended December 31, 2024				Year Ended December 31, 2023				Variance
Revenue		$	9,261,583				8,932,751				3.7	%
Cost of revenue		$	12,066,778				9,881,622				22.1	%
Gross loss		$	(2,805,195	)			(948,871	)			195.6	%
Selling, general and administrative expenses		$	7,134,120				3,158,995				125.8	%
Provision for credit losses		$	408,569				907,021				(55.0	)%
Goodwill impairment loss			-				1,023,533				(100.0	)%
Loss from operations		$	(10,347,884	)			(6,038,420	)			71.4	%
Total other expenses, net		$	(3,300,356	)			(1,081,393	)			205.2	%
Loss before income taxes		$	(13,648,240	)			(7,119,813	)			91.7	%
Income tax expense		$	5,100				218,358				(97.7	)%
Net loss		$	(13,653,340	)			(7,338,171	)			86.1	%
Gross loss % of revenues			(30.3	)%			(10.6	)%
Net loss % of revenues			(147.4	)%			(82.2	)%

Revenue

Revenue for the year ended December 31, 2024 increased 3.7% to $9,261,583 as compared to $8,932,751 for the year ended December 31, 2024. Revenue increased due to rising customer demand from existing customers and the availability of new product lines that are new to 2024.

For the years ended December 31, 2024 and 2023, we had 128 and 142 customers, respectively. Average revenue per customer for the years ended December 31, 2024 and 2023 were approximately $78,000 and $63,000, respectively. Our revenue from top 5 customers for the year ended December 31, 2024 was approximately $4.7 million compared to approximately $4.1 million for the year ended December 31, 2023, representing an increase of 16%. The higher average sale and increased revenue from top 5 customer are reflective of higher industry demand.

In addition, our staff have been in constant communication with customers on their lighting and indoor farming needs and monitor their plans to replenish old equipment and related components as well us in building new facilities. We also hired a new director of sales in January 2024 plus in March of 2024 hired a new sales representative in northern California and another hired on the east coast.

Also, our principal business is in CEA industry which rapidly expanding due to growing consumer demand for low-environmental-impact food, local food systems, and improved accessibility to high-quality produce with shorter supply chains. In addition, our access to capital market will allow us to expend significant resources to compete, increase our product supply and develop new products and new market. Starting in 2023, the Company has two customers supplying LED lighting to growers that apply to rebate programs with utility companies. Utility companies are incentivizing volume users of electricity to convert to LED lighting by providing rebates. The rebate process can take time to verify and document by Utility companies resulting in payments of 60 to 120 days. The Company believes the credit quality of rebate payers more than offset the risk of long collection turnover of receivables. For the years ended December 31, 2024 and 2023, the Company has sold via these programs with total sales to two customers of approximately $1.3 million and nil, respectively.

Costs of Revenue

Costs of revenue for the year ended December 31, 2024 increased 22.1% to $12,066,778 as compared to $9,881,622 for the year ended December 31, 2023. Cost of revenue increased primarily due to the increase in revenue, which was in turn primarily driven by higher sales volume of our products due to higher customer demand. The increase was also driven by a rise in inventory impairment, which increased to $2,315,209 for the year ended December 31, 2024, from $1,269,469 in the prior year, primarily due to slow-moving and obsolete inventory.

Gross loss

Gross loss was $2,805,195 for the year ended December 31, 2024 and $948,871 for the years ended December 31, 2023, respectively. The gross margin for the year ended December 31, 2024 decrease to (30.3)% from (10.6)% for the year ended December 31, 2023. The decrease occurred mainly due to the inventory impairment of $2,315,209 resulted from the slow-moving and obsolete inventory of Visiontech and Hydroman.

Excluding the impact of inventory impairment, the gross loss for the year ended December 31, 2024, was $489,986, with an adjusted gross margin of (5.3)%, compared to an adjusted gross profit and margin of $320,598 and 3.6%, respectively, for the prior year.

Operating expenses

Operating expenses for the year ended December 31, 2024 increased 48.2% to $7,542,689 as compared to $5,089,549 for the year ended December 31, 2023. The increase was mainly due to following reasons:

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the year ended December 31, 2024 increased 125.8% to $7,134,120 as compared to $3,158,995 for the year ended December 31, 2023. The increase was mainly due to increased compensation expenses provided to executives and key employees and increased professional fees of $1,458,985, which was attributed to increased payroll and compensation expense of $494,906. The Company started its listing on Nasdaq in March 2024 and started paying director's and officer's insurance, higher legal costs related to listing and SEC filing activities, additional costs in public relations, increased CPA review fees and outsourced providers. The increase also attributed to the Company's stock compensation expenses amounted to $1,413,458 for the year ended December 31, 2024 compared with nil for the year ended December 31, 2023.

Pursuant to various agreements and board resolutions, the Company has issued shares as compensation to employees and service providers. In connection with the merger, 3,667 shares were issued as stock compensation, including 333 shares to Charles Jourdan Hausman for his board appointment and 3,334 shares to Darin Carpenter under his employment agreement. Additionally, on March 24, 2024, the board approved stock incentives for key employees, granting 3,334 shares to George Yutuc, 1,667 shares to Kirk Collins, and 1,667 shares to Amber Wang, with a total fair value of approximately $178,000. On August 1, 2024, Darin Carpenter transitioned from Chief Operating Officer to a consultant role, and as part of this agreement, his previously granted 3,334 shares were fully vested, along with a one-month salary payment.

The Company also issued shares for services rendered by external providers. Under an investor relations consulting agreement with MZHCI LLC, 5,000 shares of restricted common stock were granted, with 2,500 shares vesting immediately and the remainder vesting on October 1, 2024, at a fair value of approximately $143,000. Additionally, pursuant to board resolutions, the Company approved share issuances for service-related agreements, including 13,334 shares to Alta Waterford LLC for digital advertising services (valued at $58,000) and 75,757 shares to PX SPAC Capital Inc. for business consulting and advisory services (valued at $200,000). These issuances were made under the 2024 Incentive Plan.

Provision for credit losses

Provision for credit losses for the year ended December 31, 2024 decreased 55.0% to $408,569 as compared to $907,021 for the year ended December 31, 2023. The decrease was mainly because we strengthened our credit risk management practices, including more rigorous customer credit evaluations and improved collection efforts, which resulted in fewer delinquent accounts and reduced the need for additional reserves.

Goodwill impairment loss

Goodwill impairment loss for the year ended December 31, 2024 decreased 100.0% to $0 as compared to $1,023,533 for the year ended December 31, 2023. The decrease was mainly because we fully impaired goodwill acquired through Hydroman as it did not bring significant synergy to us to grow our grow light unit as expect in 2023.

Other Expenses

Other expenses primarily consist of net interest expense and other finance expense related to our loans. Other expenses for the year ended December 31, 2024 was $3,300,356 as compared to other expense of $1,081,393 for the year ended December 31, 2023. The increase was mainly due to the interest expenses increased by $1,454,409 and non-cash finance expense increased by $1,000,000.

Interest expense for the years ended of December 31, 2024 and 2023 was $2,301,600 and $847,191, respectively; increased as a result of multiple convertible notes and high interest loans in 2024. Our short-term loans and convertible notes borrowing increased from $608,312 for the year ended December 31, 2023 to $6,113,484 for the year ended December 31, 2024.

Pursuant to a Letter Agreement entered on November 15, 2023, a total of 3,334 shares of our common stock will be issued upon closing of the merger in connection with certain transactions relating to merger including: (i) 1,667 shares to Tie (James) Li and 1,667 shares to Zhiyi, Zhang (or 3,334 shares in the aggregate) in connection with their guarantees of the repayment of the Newtek Loan, which was loaned to a subsidiary of us with the principal amount of $3,700,000; The shares were valued at approximately $1.0 million and was expensed as non-cash finance expenses after consummation of the Merger.

Income Tax Benefit

Our income tax benefit was amounted to $5,100 and $218,358 for the years December 31, 2024 and 2023, respectively.

The effective tax rate for the years ended December 31, 2024 and 2023 were (0.04)% and (3.07)%, respectively. The effective tax rate differs from the federal and state statutory tax rate of 21.0% primarily due to the valuation allowance on the deferred tax assets from our operating losses.

Net Loss

Net loss for the year ended December 31, 2024 was $13,653,340 as compared to net loss of $7,338,171 for the year ended December 31, 2023, representing an increase of $6,315,169. The increase in net loss for the year ended December 31, 2024 compared to the year December 31, 2023 was primarily due to increased interest expenses, salaries and compensation expense and stock compensation expense after merger, higher level of legal and accounting costs related to the Nasdaq listing and SEC filings, higher public relations costs.

LIQUIDITY AND CAPITAL RESOURCES

Sources of Liquidity

In assessing liquidity, we monitor and analyze cash on-hand and operating expenditure commitments. Our liquidity needs are to meet working capital requirements and operating expense obligations. To date, we financed our operations primarily through debt financing from financial institution and related parties. As of December 31, 2024, we had $420,131 in cash which primarily consists of bank deposits, which are unrestricted as to withdrawal and use. Our working capital deficit was approximately $14.6 million as of December 31, 2024.

On February 7, 2025, we entered into a standard merchant cash advance agreement with Wave advance Inc (the "Factor L"). The Company sold $183,750 of its accounts receivable balances on a recourse basis for credit approved accounts. The net purchase price of $107,500 was remitted to us, after the deduction of the total fees of $8,750. We agreed to pay a weekly installment of $13,125 for 14 weeks. The effective interest rate of this agreement was 113.58%. For the period ended February 28, 2025, we paid $41,559 principal of the loan.

On February 11, 2025, we entered into another standard merchant cash advance agreement with Factor I. We sold 94,250 of its accounts receivable balances on a recourse basis for credit approved accounts. The net purchase price $61,070 was remitted to the company, after the deduction of the total fees $3,390. We agreed to pay a weekly installment of $6,732 for 14 weeks. The effective interest rate of this agreement was 25.37%. The Company use this loan to pay off $18,125 previous loan with Factor I that dated on February 10, 2025. For the period ended February 25, 2025, we paid $4,362 principal of the loan.

On February 11, 2025, we entered into another standard merchant cash advance agreement with Factor K. We sold $147,000 of its accounts receivable balances on a recourse basis for credit approved accounts. The net purchase price $92,605 was remitted to the company, after the deduction of the total fees $7,395. We agreed to pay a weekly installment of $10,500 for 14 weeks. The effective interest rate of this agreement was 96.04%. The Company use this loan to pay off $37,760 previous loan with Factor K that dated on September 30, 2024. For the period ended February 25, 2025, we paid $18,389 principal of the loan.

On February 25, 2025, we entered into another standard merchant cash advance agreement with Factor L. We sold $280,770 of its accounts receivable balance on a recourse basis for credit approved accounts. The net purchase price $177,630 was remitted to the company, after the deduction of the total $13,370. We agreed to pay a weekly installment of $17,550 for 16 weeks. The effective interest rate of this agreement was 95.63%. The Company use this loan to pay off $137,500 previous loan with Factor L that dated on February 7, 2025. For the year ended February 28, 2025, we paid $41,558.94 Principal of the loan.

We have experienced recurring losses from operations and negative cash flows from operating activities since 2022. For the fiscal years ended December 31, 2023 and December 31, 2024 we incurred substantial losses as shown in the financial statement section. Our actual revenue for the year ended December 31, 2023 and 2024 was approximately $8.9 million and $9.3 million, respectively. Such volume and relatively low gross profit margins are not enough to support high administrative costs relating to our going public and expenses as a public company. We have raised equity capital twice in 2024 but utilized most proceeds towards repayment of debt incurred in the going-public merger, higher corporate costs and paying interest and principal on short-term loans. Due to the negative cash flow, our financial position is under pressure, and may potentially continue to have, an ongoing need to raise additional cash from outside sources to fund our expansion plan and related operations. Successful transition to attaining profitable operations is dependent upon achieving a level of revenues adequate to support our cost structure. In connection with our assessment of going concern considerations in accordance with Financial Accounting Standard Board's Accounting Standards Update ("ASU") 2014-15, "Disclosures of Uncertainties about an Entity's Ability to Continue as a Going Concern," management has determined that these conditions raise substantial doubt about our ability to continue as a going concern within one year after the date that these consolidated financial statements are issued. If we are unable to realize our assets within the normal operating cycle of a twelve (12) month period, we may have to consider supplementing our available sources of funds through the following sources:

●

financial support from our related parties and shareholders;

●

other available sources of financing from banks and other financial institutions;

●

equity financing through capital market

We can make no assurances that required financings will be available for the amounts needed, or on terms commercially acceptable to us, if at all. If one or all of these events does not occur or subsequent capital raises are insufficient to bridge financial and liquidity shortfall, there would likely be a material adverse effect on us and would materially adversely affect our ability to continue as a going concern.

The consolidated financial statements have been prepared assuming that we will continue as a going concern and, accordingly, do not include any adjustments that might result from the outcome of this uncertainty.

Cash Flows

The following tables set forth our selected consolidated cash flow data for the periods indicated:

		For the Years Ended December 31,
		2024				2023
		US$				US$
Net cash used in operating activities			(5,934,771	)			(1,680,128	)
Net cash used in investing activities			(40,000	)			(437,087	)
Net cash provided by financing activities			6,173,048				1,527,817
Effect of exchange rate changes			94				787
Net change in cash			198,371				(588,611	)
Cash and cash equivalents, at the beginning of year			221,760				810,371
Cash and cash equivalents, at the end of year			420,131				221,760

Operating Activities

Net cash used in operating activities was $5,934,771 for the year ended December 31, 2024, which was mainly due to our net loss of $13,653,340 with non cash expenses of $1,000,000, stock compensation expenses of $1,413,458, inventory impairment loss of $2,315,209, and other non cash item, including depreciation expense, provision for credit losses, amortization of operating right-of-use asset, amortization of debt issuance cost, and loss on loan extinguishment of $1,073,935. Our cash outflow is also increased from increase in accounts receivable of $1,672,144 due to increased revenue. Our cash outflow is offset by cash inflow of $2,609,342 due to increase from accounts payable as we increased our purchase from vendors and $952,291 decreased in inventory as we used more on hand inventory.

Net cash used in operating activities was $1,680,128 for the year ended December 31, 2023. We had net loss of $7,338,171, our cash outflow from operating cashflow decreased by $2,486,509 as we used more inventory on hand instead of making new purchases offset by decrease of accounts payable as we payoff more vendors using on hand cash.

Investing Activities

For the year ended December 31, 2024, net cash used in investing activities amount to $40,000 which was primarily for loan to Lakeshore of $40,000 prior to the Merger.

For the year ended December 31, 2023, net cash used in investing activities amount to $437,087 which was primarily for loan to related parties of $570,000, offset by loan repayment from third parties of $132,913.

Financing Activities

Net cash provided by financing activities was $6,173,048 for the year ended December 31, 2024. The increase in net cash provided was primarily a result of net proceeds from short-term loan from third parties of $4,915,984, shares and warrants issued through public offerings of $3,308,953, and convertible notes borrowing of $1,197,500, offset by payments of deferred offering costs of 266,925, repayments on long term loans of $269,119, repayments on short-term loan from third parties of $2,850,239 and repayments on convertible notes of 272,920.

Net cash provided by financing activities was $1,527,817 for the year ended December 31, 2023. The main reason for the increase in net cash provided was primarily a result of net proceeds from long-term loan borrowing from third parties of $3,338,546, short-term loan borrowing from third parties of $608,312, and short-term loan borrowing from related parties of $773,255, offset by payments of deferred offering costs of $438,932, repayments on long term loans which are mainly our car and mortgage loan of $167,830, repayments on short-term loan from third parties of $1,858,591, and repayments on short term loans from related parties of $700,000. We also obtained $197 from Merger with Lakeshore.

OFF-BALANCE SHEET ARRANGEMENTS

We do not have any off-balance sheet arrangements (as that term is defined in Item 303 of Regulation S-K) that are reasonably likely to have a current or future material effect on our financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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 3 to our 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 consolidated financial statements.

Revenue recognition

We follow Accounting Standards Codification ("ASC") 606 Revenue Recognition and recognizes revenue from product sales revenues, net of promotional discounts and return allowances, 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.

We are a growing agriculture technology company providing CEA hardware products to growers in the controlled environment agriculture industry setting in North America. Majority of our products were grow lights and related products for the indoor growing settings. Starting from first quarter of 2024, we also provide indoor grow containers to our customers.

Our contracts with customers where the amounts charged per product is fixed and determinable, the specific terms of the contracts were agreed on by us including payment terms which are typically 30 to 60 days for existing customers and prepaid for most new customers. In certain contracts involving sales to customers that entered into rebate programs who can get rebates with utility companies with utility companies for using LED lighting, payment term ranges from 60 to 120 days.

Our performance obligation is to deliver the products to customers. For indoor grow container products, we also involved in customization of the products to suit customer's specific needs. The provision of customization and configuration to meet certain technical specification per US market and delivery of product is considered one performance obligation as the services provided are not distinct within the context of the contract whereas the customers can only obtain benefit when the services and products are provided together. At times, we may charge customers shipping and handling for delivery of products, control of goods does not transfer to the customer before shipment, therefore shipping is not a promised service to us and is not considered a separate performance obligation. Any fee charged for shipping would be included in the transaction price for the good.

Transaction prices are mostly fixed. In some contracts, when determining the transaction price, we adjusts consideration for the effects of the time value of money if the timing of payments provides us with a significant benefit of financing. We does not assess whether a contract has a significant financing component if the expectation at contract inception is such that the period between payment by the customers and the transfer of the promised goods or services to the licensees will be one year or less. We had one contract with customer with installment payment terms of up to 16 months. The difference between the contract price and our cash selling price of the same products are recognized as interest income over the term of the payments. Interest income amounted to $0 and $78,385 for the year ended December 31, 2024 and 2023, respectively. This contract was terminated on July 12, 2023. For customers that entered into rebate programs with utility companies, transaction price may depend on level of energy saving the products achieved. We estimated the amount of consideration using either the expected value of the most likely amount depending on which method we expects to better predict the amount of consideration to which it will receive with a constraint applied such that a significant reversal of revenue is not probable.

We transfer the risk of loss or damage upon shipment, therefore, revenue from product sales is recognized at a point in time when control of product transfer to customer and we has no further obligation to provide services related to such product evidenced by customer signing acceptances upon receipt of goods. Return allowances, which reduce product revenue by our best estimate of expected product returns, are estimated using historical experience.

We evaluate 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. We ship the products according to shipping terms on the purchase order or sales order. Once delivery is complete, we then send an invoice to the customer according to the quantity and price of shipment.

We evaluate the indicators of control in accordance with ASU 2016-08: 1) We are the most visible entity to customers and assumes fulfilment risk and risks related to the acceptability of products, including addressing customer inquiries directly and handling of product returns or refunds directly if any. For grow light products, we have our own brand for marketing. For indoor grow containers products, we are also involved in the design and technical specification of the products to meet requirement in the US market. 2) We assume inventory risk either through storing the products in our own warehouses; or for drop shipments directly from vendors, we take the title from vendors through inspection and acceptance and are responsible for product damage during shipment period prior to acceptance of our customers and are also responsible for product return if the customer is not satisfied with the products. 3) We determine the resale price of the products. 4) We are the party that direct the use of the inventory and can prevent the vendor from transferring the product to a customer or to redirect the products to a different customer, after evaluating the above scenario, we consider ourselves the principal of these arrangements and records revenue on a gross basis.

Payments received prior to the delivery of goods to customers or picked up by the customers are recorded as contract liabilities.

We periodically provide incentive offers to our customers to encourage purchases. Such offers include current discount offers, such as percentage discounts off current purchases and other similar offers.

Current discount offers, when accepted by our customers, are treated as a reduction to the transaction price of the related transaction.

Sales discounts are recorded in the period in which the related sale is recognized. Sales return allowances are recorded upon recognizing the related sales.

Inventory

Inventory consists of finished goods ready for sale and is stated at the lower of cost and net realizable value. We value our inventory using the weighted average costing method. We include a part of cost of goods sold any freight incurred to ship the product from our vendors to warehouses. Outbound freight costs related to shipping costs to customers are considered period costs and reflected in cost of revenue. We regularly review inventory and consider forecasts of future demand, market conditions and product obsolescence.

If the estimated realizable value of the inventory is less than cost, we make provisions in order to reduce our carrying value to our estimated market value. We also review inventory for slow moving and obsolescence and records allowance for obsolescence.

Recently issued accounting pronouncements

In November 2023, the FASB issued ASU 2023-07, which is an update to Topic 280, Segment Reporting: Improvements to reportable Segment Disclosures ("ASU 2023-07"), which enhances the disclosure required for reportable segments in annual and interim consolidated financial statements, including additional, more detailed information about a reportable segment's expenses. ASU 2023-07 will be effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024.The Company adopted ASU 2023-07, which was applied retrospectively to all prior periods presented. Refer to Note 18 herein for further details regarding this adoption.

In December 2023, the FASB issued Accounting Standards Update No. 2023-09, "Income Taxes (Topic 740): Improvements to Income Tax Disclosures" ("ASU 2023-09"), which modifies the rules on income tax disclosures to require entities to disclose (1) specific categories in the rate reconciliation, (2) the income or loss from continuing operations before income tax expense or benefit (separated between domestic and foreign) and (3) income tax expense or benefit from continuing operations (separated by federal, state and foreign). ASU 2023-09 also requires entities to disclose their income tax payments to international, federal, state and local jurisdictions, among other changes. The guidance is effective for annual periods beginning after December 15, 2024. Early adoption is permitted for annual financial statements that have not yet been issued or made available for issuance. ASU 2023-09 should be applied on a prospective basis, but retrospective application is permitted. We are currently evaluating the potential impact of adopting this new guidance on our consolidated financial statements and related disclosures.

Except as mentioned above, we do not believe other recently issued but not yet effective accounting standards, if currently adopted, would have a material effect on our consolidated balance sheets, statements of income and comprehensive income and statements of cash flows.