UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
☒ Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2024
☐ Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from __________ to __________
Registration No. 000-56532
ESG INC.
(Exact name of registrant as specified in its charter)
Nevada | 87-1918342 | |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | |
523 School House Rd. Kennett Square, PA | 19348 | |
(Address of Principal Executive Offices) | (Zip Code) |
267-467-5871
(Registrant’s telephone number, including area code)
n/a | n/a |
(Former Name, former address and former fiscal year, if changed since last report)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “non-accelerated filer,” “ smaller reporting company,” and “ emerging growth company ” in Rule 12b-2 of the Exchange Act. (Check all that apply):
Large accelerated filer | ☐ | Accelerated filer | ☐ |
Non-accelerated filer | ☒ | Smaller reporting company | ☒ |
Emerging growth company | ☒ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date:
common shares issued and outstanding as of June 30, 2024.
ESG INC.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
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Part I. Financial Information
Item 1. Financial Statements (unaudited)
ESG INC.
Consolidated Balance Sheet
June 30, 2024 (Unaudited) | December 31, 2023 | |||||||
ASSETS | ||||||||
Current Assets | ||||||||
Cash | 135,223 | 342,342 | ||||||
Accounts receivable and other receivables | 149,360 | 79,221 | ||||||
Advance to suppliers | 1,425,950 | 166,010 | ||||||
Inventaries | 2,173,954 | 1,651,376 | ||||||
Total Current Assets | 3,884,487 | 2,238,949 | ||||||
Property, plant and equipment, net | 17,763,242 | 18,694,969 | ||||||
Intangible assets, net | 2,997,136 | 3,085,906 | ||||||
Value added tax receivable | 2,267,926 | 2,211,980 | ||||||
Note receivable | - | 41,848 | ||||||
Total Non-current Assets | 23,028,304 | 24,034,703 | ||||||
Total Assets | 26,912,791 | 26,273,652 | ||||||
LIABILITIES AND EQUITY | ||||||||
Currrent Liabilities | ||||||||
Short-term bank loans | 6,877,941 | 6,904,228 | ||||||
Account payable | 3,012,362 | 1,450,405 | ||||||
Payable to related party | 30,000 | |||||||
Accrued expenses and other liabilities | 2,536,454 | 2,312,772 | ||||||
Deferred revenue | 1,263,353 | 1,355,552 | ||||||
Total Current Liabilities | 13,690,110 | 12,052,957 | ||||||
Long-term payable | 1,331,190 | 1,423,116 | ||||||
Total Non-current liabilities | 1,331,190 | 1,423,116 | ||||||
Total Liabillities | 15,021,300 | 13,476,073 | ||||||
Shareholders' Equity (Deficit) | ||||||||
Common stock, $ | par value, authorized, issued and outstanding as of June 30, 2024 and December 31,2023.25,900 | 25,900 | ||||||
Additional paid in capital | 11,152,388 | 11,152,388 | ||||||
Accumulated comprehensive income (loss) | (597,819 | ) | (430,206 | ) | ||||
Accumulated deficit | (1,731,131 | ) | (1,224,811 | ) | ||||
Equity Attributable to stockholders of ESG Inc. | 8,849,338 | 9,523,271 | ||||||
Equity attributable to noncontrolling interest | 3,042,153 | 3,274,308 | ||||||
Total Equity | 11,891,491 | 12,797,579 | ||||||
Total Liabilities and Stockholders' Equity | 26,912,791 | 26,273,652 |
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ESG INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, 2024 | June 30, 2023 | June 30, 2024 | June 30, 2023 | |||||||||||||
Revenues | 2,509,781 | 3,632,544 | 4,888,062 | 5,440,863 | ||||||||||||
Cost of goods sold | 2,077,594 | 2,929,277 | 4,546,508 | 4,394,606 | ||||||||||||
Gross Profit | 432,187 | 703,267 | 341,554 | 1,046,257 | ||||||||||||
Research and development cost | 128,696 | 174,263 | 259,784 | 304,467 | ||||||||||||
Selling expenses | 2,285 | 377 | 2,484 | 600 | ||||||||||||
General and administrative expense | 145,305 | 323,177 | 463,422 | 596,318 | ||||||||||||
Operating Income | 155,901 | 205,450 | (384,136 | ) | 144,872 | |||||||||||
Interest (expense) | (132,118 | ) | (199,973 | ) | (281,605 | ) | (349,687 | ) | ||||||||
Other Income (loss) | 80,540 | 75,684 | (15,424 | ) | 103,528 | |||||||||||
Income before Income Taxes | 104,323 | 81,161 | (681,165 | ) | (101,287 | ) | ||||||||||
Income taxes | - | - | - | - | ||||||||||||
Consolidated net Income (loss) | 104,323 | 81,161 | (681,165 | ) | (101,287 | ) | ||||||||||
Less: Net loss attributable to noncontrolling interest | 22,976 | 24,608 | (174,845 | ) | (15,492 | ) | ||||||||||
Net Income (Loss) Attributable to Shareholders of ESG Inc. | 81,347 | 56,553 | (506,320 | ) | (85,795 | ) | ||||||||||
Other comprehensive items | ||||||||||||||||
Foreign currency translation gain (loss) attributable to the Company | (8,033 | ) | (413,983 | ) | (167,613 | ) | (370,924 | ) | ||||||||
Foreign currency translation gain (loss) attributable to noncontroling interest | (2,746 | ) | (141,551 | ) | (57,310 | ) | (126,828 | ) | ||||||||
Total Comprehensive Income Attributable to Noncontrolling Interest | 20,230 | (116,943 | ) | (232,155 | ) | (142,320 | ) | |||||||||
Total comprehensive Income Attributable to Shareholders of Esg Inc. | 73,314 | (357,430 | ) | (673,933 | ) | (456,719 | ) | |||||||||
Net loss per share - basic and diluted | ) | ) | ) | |||||||||||||
Weighted average shares outstanding - basic and diluted |
-2- |
ESG INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
Common stock | Additional paid aid-in | Accumulated income | Accumulated other comprehensive | Total Company's | Noncontrolling | |||||||||||||||||||||||||||
Share | Amount | capital | (deficit) | income | equity | interest | Total | |||||||||||||||||||||||||
Balance at December 31, 2023 | 25,899,468 | $ | 25,900 | $ | 11,152,388 | $ | (1,224,811 | ) | $ | (430,206 | ) | $ | 9,523,271 | $ | 3,274,308 | $ | 12,797,579 | |||||||||||||||
Net loss | - | - | - | (587,667 | ) | - | (587,667 | ) | (197,821 | ) | (785,488 | ) | ||||||||||||||||||||
Foreign currency translation adjustment | - | - | - | - | (159,580 | ) | (159,580 | ) | (54,564 | ) | (214,144 | ) | ||||||||||||||||||||
Balance at March 31, 2024 | 25,899,468 | 25,900 | 11,152,388 | (1,812,478 | ) | (589,786 | ) | 8,776,024 | 3,021,923 | 11,797,947 | ||||||||||||||||||||||
Net loss | - | - | - | 81,347 | - | 81,347 | 22,976 | 104,324 | ||||||||||||||||||||||||
Foreign currency translation adjustment | - | - | - | - | (8,033 | ) | (8,033 | ) | (2,746 | ) | (10,779 | ) | ||||||||||||||||||||
Balance at June 30, 2024 | 25,899,468 | $ | 25,900 | $ | 11,152,388 | $ | (1,731,131 | ) | $ | (597,819 | ) | $ | 8,849,338 | $ | 3,042,153 | $ | 11,891,491 | |||||||||||||||
Balance at December 31, 2022 | 25,899,468 | 25,900 | 11,152,388 | (900,098 | ) | (148,590 | ) | 10,129,600 | 3,438,129 | 13,567,729 | ||||||||||||||||||||||
Net loss | - | - | - | (142,348 | ) | - | (142,348 | ) | (40,100 | ) | (182,448 | ) | ||||||||||||||||||||
Foreign currency translation gain | - | - | - | - | 43,059 | 43,059 | 14,723 | 57,782 | ||||||||||||||||||||||||
Balance at March 31, 2023 | 25,899,468 | 25,900 | 11,152,388 | (1,042,446 | ) | (105,531 | ) | 10,030,311 | 3,412,752 | 13,443,063 | ||||||||||||||||||||||
Net loss | - | - | - | 56,553 | - | 56,553 | 24,608 | 81,161 | ||||||||||||||||||||||||
Foreign currency translation gain | - | - | - | - | (413,983 | ) | (413,983 | ) | (141,551 | ) | (555,534 | ) | ||||||||||||||||||||
Balance at June30, 2023 | 25,899,468 | $ | 25,900 | $ | 11,152,388 | $ | (985,893 | ) | $ | (519,514 | ) | $ | 9,672,881 | $ | 3,295,809 | $ | 12,968,690 |
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ESG INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the six-months ended | ||||||||
June 30, 2024 | June 30, 2023 | |||||||
Cash flows from operating activities: | ||||||||
Consolidated net loss | $ | (681,165 | ) | $ | (101,287 | ) | ||
Adjustments to reconcile loss to net cash used in operating activities: | ||||||||
Depreciation and amortization | 901,289 | 740,663 | ||||||
Changes in assets and liabilities: | ||||||||
Accounts receivable and other receivable | (70,139 | ) | (268,142 | ) | ||||
Advance to suppliers | (1,259,940 | ) | (424,335 | ) | ||||
Inventory | (522,578 | ) | 448,821 | |||||
Value added tax receivable | (55,946 | ) | 84,612 | |||||
Note receivable | 41,848 | 2,179 | ||||||
Accounts payable | 1,561,957 | (65,750 | ) | |||||
Payable to related party | (30,000 | ) | 8,689 | |||||
Accrued expenses and other paybles | 223,682 | 176,975 | ||||||
Deferred revenue | (92,199 | ) | (175,244 | ) | ||||
Net cash provided by operating activities | 16,808 | 427,181 | ||||||
Cash flows from investing activities: | ||||||||
Acquisition of fixed assets | (264,441 | ) | - | |||||
Net cash used in investing activities | (264,441 | ) | - | |||||
Cash flows from financing activities: | ||||||||
Proceeds from loans | 41,517 | - | ||||||
Payment of debt | (98,370 | ) | - | |||||
Net cash provided by (used in) financing activities | (56,854 | ) | - | |||||
Effect of exchange rate changes on cash | 97,368 | (419,605 | ) | |||||
Net increase (decrease) in cash | (207,118 | ) | 7,576 | |||||
Cash, at beginning of period | 342,342 | 199,045 | ||||||
Cash, at end of period | $ | 135,223 | $ | 206,621 | ||||
Supplemental disclousures of cash flow information: | ||||||||
Cash paid for interest | $ | (281,605 | ) | $ | (349,687 | ) | ||
Cash paid for income tax | $ | - | $ | - |
-4- |
ESG INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2024
(Unaudited)
NOTE 1- ORGANIZATION AND DESCRIPTION OF BUSINESS
ESG Inc. (“ESG”) was incorporated in July 2021, a Nevada corporation and headquartered at Kennett Square, Pennsylvania, USA, and is a holding company without operations and is engaged in food production and distribution through its subsidiaries.
ESG incorporated ESG China Limited as ESG’s wholly owned subsidiary in Hong Kong on November 18, 2022. ESG China Limited incorporated Hainan ESG Technology Co., Ltd., a China corporation (“Hainan ESG”) with 100% of ownership on January 16, 2023. ESG, ESG China Limited and Hainan ESG have no operations or transactions.
On September 28, 2023, ESG entered into a share exchange agreement with Funan Allied United Farmer Products Co., Ltd., a China corporation incorporated in May 2017 (“AUFP”), and 74.52% of shareholders of AUFP, (each a “Shareholder,” and collectively, the “Shareholders”), through Hainan ESG. Pursuant to such agreement, the Shareholders exchanged their equity of AUFP to Hainan ESG for shares of common stock of ESG, and ESG has agreed to offer 74.52% subsidiary of ESG through Hainan ESG.
of ESG shares. Following this transaction, AUFP became a
AUFP incorporated Anhui Allied United Mushroom Technology Co., Ltd. (“AUMT”) in China in March 2018, to manufacture white button mushroom compost while AUFP incorporated Anhui Allied United Mushroom Co., Ltd. (“AUM”) in China in April, 2018, to grow fresh white button mushroom and provide mushroom growing management services. AUFP, AUMT and AUM are operating entities in China.
Prior to the share exchange, Mr. Zhi Yang owned 30 % of AUFP, Fuyang Zhihan Agricultural Information Co. Ltd. (“Zhihan”) owned 24.52% of AUFP and Mr. Chris Alonzo owned 10% of AUFP. ESG, after the share exchange agreement described above is completed, owns 74.52% of AUFP and its subsidiaries, AUM and AUMT in China. Currently Mr. Zhi Yang and Zhihan control 83.526% of ESG through DCG China Limited , and Mr. Christopher Alonzo owns 5.406% of ESG.
Since the Company is effectively controlled by the same controlling shareholders before and after the share exchange agreement, it is considered under common control. Therefore the above mentioned transactions were accounted for as a recapitalization. The reorganization has been accounted for 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 financial statements of the Company.
Our operating subsidiaries are involved in direct white button mushroom composting, growing, food production, distribution as well as import and export of Phase III compost and food to strategize. With the core business philosophy to develop and operate sustainable and technology-driven food businesses consistent with the principles of Environmental, Sustainable and Governance investing, we believe that the growing global demand for sustainable high quality food presents a unique opportunity to operate companies engaged in this critical area that is being paid increasing attention by global investors.
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NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation and consolidation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and include all adjustments necessary for the fair presentation of the Company’s financial position for the periods presented.
The consolidated financial statements of the Company include the financial statements of the Company and its 74.52% owned subsidiaries in China. All inter-company transactions and balances between the Company and its subsidiaries have been eliminated upon consolidation. The Equity attributable to minority shareholders who own 25.48% of AUFP and its subsidiaries are non-controlling interest (“NCI”). The NCI were $3,042,153 and $3,274,308 as of June 30, 2024 and December 31, 2023, respectively.
Interim Financial Information
The unaudited financial statements have been prepared in accordance with generally accepted accounting principles (GAAP) applicable to interim financial information and the requirements of Form 10-Q and Rule 8-03 of Regulation S-X of the Securities and Exchange Commission. Accordingly, they do not include all of the information and disclosure required by accounting principles generally accepted in the United States of America for complete financial statements. Interim results are not necessarily indicative of results for a full year. In the opinion of management, all adjustments considered necessary for a fair presentation of the financial position and the results of operations and cash flows for the interim periods have been included. These financial statements should be read in conjunction with the audited financial statements as of and for the year ended December 31, 2023, as not all disclosures required by generally accepted accounting principles for annual financial statements are presented. The interim financial statements follow the same accounting policies and methods of computations as the audited financial statements as of and for the year ended December 31, 2023.
Use of estimates
In preparing the consolidated financial statements in conformity with U.S. GAAP, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of consolidated financial statements, as well as the reported amounts of revenues and expenses during the reporting year. Significant items subject to such estimates and assumptions include allowance for doubtful accounts, advances to suppliers, valuation of inventories, useful lives of property, plant, and equipment and intangible assets.
Cash and cash equivalent
Cash and cash equivalent includes demand deposits with financial institutions that are highly liquid in nature.
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Account receivable
Accounts receivable are presented net of an allowance for doubtful accounts. The Company maintains an allowance for doubtful accounts for estimated losses. The Company reviews its accounts receivable on a periodic basis and makes general and specific allowance when there is doubt as to the collectability of individual balances. In evaluating the collectability of individual receivable balances, the Company considers many factors, including the age of the balance, customer’s payment history, its current creditworthiness and current economic trends. Accounts are written off after efforts at collection prove unsuccessful. As of June 30, 2024 and December 31, 2023, allowance for doubtful accounts was nil 0 and nil 0, respectively.
Advances to suppliers, net
Advances to suppliers represent prepayments made to ensure continuous high-quality supplies and favorable purchase prices for premium quality. These advances are settled upon suppliers delivering raw materials to the Company when the transfer of ownership occurs. The Company review its advances to suppliers on a periodic basis and makes general and specific allowances when there is doubt as to the ability of a supplier to provide supplies to the Company or refund an advance. As of June 30, 2024 and December 31, 2023, advance to suppliers was $1,425,950 and $166,010, respectively and allowance for doubtful accounts was nil and nil, respectively.
Inventory
Inventory is comprised primarily of raw materials, work-in-progress and finished goods. The value of inventory is determined using the weighted average method. The Company periodically estimates an inventory allowance for estimated unmarketable inventories when necessary. Inventory amounts are reported in net of allowances. As of June 30, 2024 and December 31, 2023, inventories were $2,173,954 and $1,651,376.
Property, plant and equipment, net
Property, plant and equipment are stated at cost, less accumulated depreciation. Major repair and improvements that significantly extend original useful lives or improve productivity are capitalized and depreciated over the period benefited. Repair and maintenance costs are expensed as incurred. Depreciation is recorded principally by the straight-line method over the estimated useful lives of our property, plant and equipment which generally have the following ranges: buildings and improvements: 20 years; machinery and equipment: 5-10 years; office equipment: 3-5 years. Construction in progress is not depreciated until ready for service.
Intangible assets, net
Intangible assets with finite lives are amortized using the straight-line method over their estimated period of benefit. Evaluation of the recoverability of intangible assets is made to take into account events or circumstances that warrant revise estimates of useful lives or that indicate that impairment exists. All of the Company’s intangible assets are subject to amortization. No impairment of intangible assets has been identified as of the balance sheet date.
Intangible assets consist of land use rights, patent and purchased software. Intangible assets are stated at cost less accumulated amortization. The land purchased for industrial use has the right of use for 50 years. We amortized the right to use land in 50 years. Patent and software amortized using the straight-line method with estimated useful lives of 12 years and 5 years, respectively.
Revenue recognition
The Company follows Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (ASC 606).
FASB ASC Topic 606 requires the use of a new five-step model to recognize revenue from customer contracts. The five-step model requires the Company (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, including variable consideration to the extent that it is probable that a significant future reversal will not occur, (iv) allocate the transaction price to the respective performance obligations in the contract, and (v) recognize revenue when (or as) the Company satisfies each performance obligation.
Revenue is generated by selling fresh mushrooms to authorized distributors and wholesalers mainly in Yangzi River Delta. Contracts were signed after the communication of the price and quantities with customers. Our sales terms generally do not allow to sell without a deposit being made and do not allow for a right of return. Usually, the deposit from the customer equals or more than the sales amount. Control of the mushrooms is transferred upon receipt or loaded in the truck of carriers at our warehouse, as determined by the specific terms of the contract. Upon transfer of control to the customer, which completes our performance obligation, revenue is recognized.
We signed contracts with two distributors who purchase all the products. Sell volume to one distributor was 41% and to the other was 59% for the three and six months ended June 30, 2024 and 2023.
Deferred income
Deferred revenue consists primarily of government grants. Government grants (sometimes referred to as subsidies, subventions, etc.) are as assistance by government in the form of transfers of resources to an entity in return for past or future compliance with certain conditions relating to the operating activities of the entity.
Government grants received relating to depreciable assets are recorded as deferred income and recognized in over the life of the related assets. The Company recorded income when receiving a grant which constitutes compensation for expenses or losses already incurred or for the purpose of giving immediate financial support to the entity with no future related costs.
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Research and development expenses
Research and development expenses are expensed in the period when incurred. These costs primarily consist of costo f materials used, salaries paid for the Company’s development department, and fees paid to the third parties. The research and development expenses were $128,696 and $259,784, $174,263 and $304,467, respectively for the three and six months June 30, 2024 and 2023.
Noncontrolling interests
The Company follows FASB ASC Topic 810, “Consolidation,” governing the accounting for and reporting of noncontrolling interests (“NCIs”) in partially owned consolidated subsidiaries and the loss of control of subsidiaries. Certain provisions of this standard indicate, among other things, that NCI (previously referred to as minority interests) be treated as a separate component of equity, not as a liability, that increases and decreases in the parent’s ownership interest that leave control intact be treated as equity transactions rather than as step acquisitions or dilution gains or losses, and that losses of a partially-owned consolidated subsidiary be allocated to non-controlling interests even when such allocation might result in a deficit balance.
The net income (loss) attributed to NCI was separately designated in the accompanying statements of operations and comprehensive income (loss). Losses attributable to NCI in a subsidiary may exceed a non-controlling interest’s interests in the subsidiary’s equity. The excess attributable to NCIs is attributed to those interests. NCIs shall continue to be attributed their share of losses even if that attribution results in a deficit NCI balance.
AUFP and its subsidiaries, AUM and AUMT were 25.48% owned by noncontrolling interest and $3,042,153 and $3,274,308 of equity were attributable to noncontrolling interest as of June 30, 2024 and December 31, 2023, respectively. During the three months ended June 30, 2024 and 2023, the Company had net income of $22,976 and $24,608, respectively, attributable to the noncontrolling interest. The Company had net loss of $174,845 and $15,492, repectively attributable to the noncontrolling interest for the six months ended June 30, 2024 and 2023.
Foreign currency translation and comprehensive income (loss)
The accounts of the Company’s Chinese entities are maintained in Chinese Yuan (“RMB”) and the accounts of the U.S. parent company are maintained in United States dollar (“USD”). The accounts of the Chinese entities were translated into USD in accordance with FASB ASC Topic 830 “Foreign Currency Matters.” All assets and liabilities were translated at the exchange rate on the balance sheet date; stockholders’ equity is translated at historical rates and the statements of operations and cash flows are translated at the weighted average exchange rate for the period. The resulting translation adjustments are reported under other comprehensive income (loss) in accordance with FASB ASC Topic 220, “Comprehensive Income.” Gains and losses resulting from foreign currency transactions are reflected in the statements of operations.
The Company follows FASB ASC Topic 220-10, “Comprehensive Income (loss).” Comprehensive income (loss) comprises net income (loss) and all changes to the statements of changes in stockholders’ equity, except those due to investments by stockholders, changes in additional paid-in capital and distributions to stockholders.
The exchange rates used to translate amounts in RMB to USD for the purposes of preparing the CFS were as follows:
Schedule of foreign currency exchange rates | ||||||||||||||||||||
June 30, 2024 | March 31, 2024 | December 31, 2023 | June 30, 2023 | March 31, 2023 | ||||||||||||||||
Period-end date USD: RMB exchange rate | 7.2212 | 7.2021 | 7.0797 | 7.1632 | 6.8688 | |||||||||||||||
Average USD for the reporting period: RMB exchange rate | 7.1859 | 7.1589 | 7.0750 | 6.9278 | 6.8419 |
Income taxes
The Company uses the asset and liability method of accounting for income taxes in accordance with FASB ASC Topic 740, “Income Taxes.” Under this method, income tax expense is recognized for the amount of: (i) tax payable or refundable for the current period and (ii) deferred tax consequences of temporary differences resulting from matters that have been recognized in an entity’s financial statements or tax returns. Deferred tax assets also include the prior year’s net operating losses carried forward.
The Company accounts for income for income taxes in accordance with ASC 740, Income Taxes. ASC 740 requires an asset and liability approach for financial accounting and reporting for income taxes and allows recognition and measurement of deferred tax assets based upon the likelihood of realization of tax benefits in future years. Under the asset and liability approach, deferred taxes are provided for the net effects of temporary difference between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before the Company is able to realize their benefits, or not be deductible in the future.
Contingencies
Certain conditions may exist as of the date the consolidated financial statements (“CFS”) are issued, which may result in a loss to the Company but which will only be resolved when one or more future events occur or fail to occur. In accordance with ASC 450, the Company’s management and legal counsel assess such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company’s legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought. If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, the estimated liability would be accrued in the Company’s CFS.
If the assessment indicates that a potential material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material, would be disclosed.
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NOTE 3- GOING CONCERN
The accompanying consolidated financial statements were prepared assuming the Company will continue as a going concern, which contemplates continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business. The Company had an accumulated deficit of approximately $1,731,131 and $1,224,811 as of June 30, 2024 and December 31, 2023, respectively. Although the operating results were positive for the three months ended June 30, 2024, the recurring losses in the past raise the question related to the substantial doubt about the Company’s ability to continue as a going concern.
To enhance our ability to continue to operate, we are dedicating resources to generate recurring revenues and sustainable operating cash flows. Currently, we are increasing our production capacity to generate more revnues and decrease unit cost.
NOTE 4- ACCOUNT RECEIVABLE AND OTHER RECEIVABLES
Account receivable and other receivable consisted of the following:
Schedule of foreign currency exchange rates | ||||||||
June 30, 2024 (Unaudited) | December 31, 2023 | |||||||
Accounts receivable | $ | 61,315 | $ | - | ||||
Other receivable | 88,045 | 79,221 | ||||||
Total | $ | 149,360 | $ | 79,221 |
NOTE 5 – PROPERTY, PLANT AND EQUIPMENT
The following table summarizes our property, plant and equipment:
Schedule of property and equipment | ||||||||
June 30, 2024 (Unaudited) | December 31, 2023 | |||||||
Buildings and improvements | $ | 15,986,266 | $ | 16,276,614 | ||||
Machinery, equipment and vehicle fleet | 8,707,241 | 8,597,430 | ||||||
Construction in progress | 21,295 | 21,682 | ||||||
Property, plant and equipment - cost | 24,714,802 | 24,895,726 | ||||||
Less: Accumulated depreciation | (6,951,560 | ) | (6,200,757 | ) | ||||
Property, plant and equipment - net | $ | 17,763,242 | $ | 18,694,969 |
For the three months ended June 30, 2024 and 2023, depreciation expense was $433,391 and $395,414, respectively. For the six months ended June 30, 2024 and 2023, depreciation expense was $867,378 and $705,489, respectively.
NOTE 6: INVENTORIES
Inventories consisted of the following:
Schedule of inventories | ||||||||
June 30 2024 | December 31, | |||||||
(Unaudited) | 2023 | |||||||
Raw materials | $ | 2,041,615 | $ | 1,516,634 | ||||
Finished goods | - | - | ||||||
Work in progress - compost | 88,715 | 90,326 | ||||||
- growing mushrooms | 43,624 | 44,416 | ||||||
Total | $ | 2,173,954 | $ | 1,651,376 |
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NOTE 7: INTANGIBLE ASSETS
Intangible assets are stated at cost or acquisition-date fair value less accumulated amortization and consist of the following:
Schedule of intangible assets | ||||||||
June 30, 2024 | December 31, | |||||||
(Unaudited) | 2023 | |||||||
Land use right | $ | 3,268,621 | $ | 3,327,987 | ||||
Software | 7,563 | 7,701 | ||||||
Patent | 6,919 | 7,045 | ||||||
Subtotal | 3,283,103 | 3,342,733 | ||||||
Less: Accumulated amortization | (285,967 | ) | (256,827 | ) | ||||
Total | $ | 2,997,136 | $ | 3,085,906 |
Amortization expenses were $16,894 and $17,368, respectively for the three months ended June 30, 2024 and 2023, $33,911 and $35,174, respectively for the six months ended June 30, 2024 and 2023.
Estimated future amortization expense is as follows as of June 30, 2024:
Schedule of estimated future amortization expense | ||||
Years ending December 31, | Amortization expense | |||
2024 | 67,437 | |||
2025 | 67,437 | |||
2026 | 67,437 | |||
2027 | 67,437 | |||
2028 | 67,437 | |||
Thereafter | 2,659,951 | |||
Total | 2,997,136 |
NOTE 8- BANK LOANS
Short-term bank loans consisted of the following:
Schedule of short-term bank loans | ||||||||||||||||||||||||
June 30, 2024 (unaudited) | Interest rate | Due date | December 31, 2023 | Interest rate | Due date | |||||||||||||||||||
Agricultural Bank of China Funan Branch | $ | 788,818 | 4.50 | % | 4/06/25 | $ | 845,416 | 3.70 | % | 4/10/24 | ||||||||||||||
Anhui Funan Rural Commercial Bank | 1,937,448 | 5.60 | % | 12/22/24 | 1,972,637 | 5.90 | % | 12/22/24 | ||||||||||||||||
Anhui Funan Rural Commercial Bank | 1,383,892 | 5.60 | % | 3/28/25 | 1,409,026 | 5.90 | % | 3/28/24 | ||||||||||||||||
Anhui Funan Rural Commercial Bank | 830,335 | 5.60 | % | 1/25/25 | 845,416 | 5.90 | % | 1/25/24 | ||||||||||||||||
Industrial and Commercial Bank of China, Funan (1) | 691,946 | 3.45 | % | 10/12/24 | 704,512 | 3.45 | % | 10/12/24 | ||||||||||||||||
Industrial and Commercial Bank of China, Funan (2) | 13,839 | 3.45 | % | 6/06/25 | - | - | - | |||||||||||||||||
Bank of China Funan Branch | 1,107,113 | 3.60 | % | 3/15/25 | 1,127,221 | 3.60 | % | 3/15/25 | ||||||||||||||||
Total | $ | 6,877,941 | - | - | $ | 6,904,228 | - | - |
(1) | The loans from Bank of China were pledged by fixed assets as of June 30, 2024 and December 31, 2023, respectively. |
(2) | The loans from Industrial and Commercial Bank of China, Funan branch were pledged by fixed assets as of June 30, 2024. |
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NOTE 9- ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consisted of the following:
Schedule of accrued expenses and other current liabilities | ||||||||
June 30, 2024 (Unaudited) | December 31, 2023 | |||||||
Advances from customers | $ | 74,262 | $ | 63,867 | ||||
Salary payable | 100,116 | 181,950 | ||||||
Tax payable | 15,423 | 16,131 | ||||||
Other payable | 2,346,653 | 2,050,824 | ||||||
Total | $ | 2,536,454 | $ | 2,312,772 |
Other payable was primarily comprised of loans from non-bank institutions. Loans included $276,778 and $281,805, respectively from Funan Agricultural Investment Co. Ltd, and $1,383,891 and $1,409,026, respectively from Funan Small Business financing service center as of June 30, 2024 and December 31, 2023.
NOTE 10- VALUE ADDED TAX RECEIVABLE
Selling merchandise in China is generally subject to the value-added tax (“VAT”). The Company and its subsidiaries’ primary operations are classified as agriculture products and its revenue is exempt from VAT and income tax. The amount of VAT liability is determined by applying the applicable tax rate to the invoiced amount of goods sold (output VAT) less VAT paid on purchases made with the relevant supporting invoices (input VAT). VAT input was primarily due to purchase of property, plant and equipment. As of June 30, 2024 and December 31, 2023, VAT input was $2,267,926 and $2,211,980, respectively. VAT input can deduct VAT output or be refunded when selling non-exempt goods. Anhui Allied United Mushroom Technology and Anhui Allied United Mushroom are engaged in agricultural production in China, and their value-added tax are exempted. The Company plans to produce processed mushrooms in the near future to utilize VAT input to offset VAT output.
NOTE 11- ASSET ACQUISITION
On May 11, 2021, Anhui Allied United Mushroom Co., Ltd. signed the Agreement (“Agreement”) with Suhua Yang and Hao Yan, the owners of Funan Zhihua Mushroom Co., Ltd. (“Target Company”). As the consideration of transferring 100% equity of Target Company, AUM will pay Shareholders with $2,151,383 (RMB 14,840,028), which is $25,612 (RMB176,667) per month for 84 months at the end of each month after the delivery of the growing rooms. Target Company was dissolved after the asset acquisition.
NOTE 12- COMMITMENTS AND CONTINGENCIES
Commitments
On January 5, 2022, Funan Modern Recycling Agriculture Investment Co., Ltd. (“FMRA”) signed an agreement with AUFP to fund AUFP 115 million RMB ($18.09 million) on the expansion of composting facilities including 6 bunkers and 22 tunnels. According to the agreement, AUFP transfers the land use right of 46,662 square meters which the composting facilities will be constructed on to FMRA and starts to pay rent for 10 years after AUFP uses the facilities. Once rents are paid, FMRA transfers the land use right and deed of composting facilities to AUFP. All the costs related to the transfer of land use right are paid by FMRA.
Legal contingencies
Management has identified certain legal mattes where we believe an unfavorable outcome is resonably estimated. Management believes that the total liabilities of the Company that may arise as a result of currently pending proceedings will not have a material adverse effect on the Company taken as a whole.
On September 3, 2021, Anhui Daquan Construction Company ("Daquan”) filed a lawsuit against Funan Zhihua Mushroom Co., Ltd. (a merged company, “Zhihua”) on unpaid contractual price of $48,744. Zhihua has a dispute on construction quality which did not meet the requirements specified in the contract and filed a lawsuit for $26,095 of damage. On June 6, 2023, Daquan paid $26,095 to Zhihua to settle the lawsuit.
On November 10, 2022, Funan Yuanlangju Construction Co., Ltd. filed a lawsuit against AUFP for $60,147. The plaintiff sold construction materials to AUFP. AUFP had a dispute with the plaintiff over the amount of the sale. On July 7, 2023, the two parties reached a settlement that AUFP paid the plaintiff $50,740 in 2023.
On December 2, 2022, Liu Pengpeng filed a lawsuit against AUFP for $66,066. Liu Pengpeng signed a contract with AUFP on installation work and drainage construction. Liu Pengpeng breached the contract and failed to complete the construction work on time which caused a loss to AUFP. On July 7, 2023, Liu Pengpeng withdrew the lawsuit. On November 20, 2023, Liu Pengpeng filed a lawsuit for the same claim.
NOTE 13: DEFERRED INCOME
As of June 30, 2024 and December 31, 2023, deferred income was $1,263,353 and $1,355,552, respectively. The Company recognized $156,582 and $170,164, respectively of government grants for the six months ended June 30, 2024 and 2023. Asset-based grants were $68,437 and $127,765, respectively for the six months ended June 30, 2024 and 2023. Income-based grants were $88,145 and $42,399, respectively for the six months ended June 30, 2024 and 2023.
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NOTE 14- INCOME TAXES
The Company record no income taxes for the six months ended June 30, 2024 and for the year ended December 31, 2023. Net income and net loss were not offset among the operating subsidiaries. Net income of $49,649 and $2,234,442 were exempt from income tax for the periods ended June 2024 and December 31, 2023, respectively.
Schedule of effective tax rates | ||||||||
June 30, 2024 (Unaudited) | December 31, 2023 | |||||||
US federal statutory rates | -21 | % | -21 | % | ||||
Tax rate difference between PRC and U.S. | -4 | % | -4 | % | ||||
Effect of income tax exemption on certain income | (36 | %) | (1.23 | ) | ||||
Change in valuation allowance | 61 | % | 1.48 | |||||
Effective tax rate | $ | - | $ | - |
The provison for income tax expense (benefit) for the six months ended June 30, 2024 and 2023 consisted of the following:
Schedule of income tax expense (benefit) | ||||||||
For the six months ended | ||||||||
June 30, 2024 (Unaudited) | June 30, 2023 (Unaudited) | |||||||
Income tax expense - current | $ | - | $ | - | ||||
Income tax benefit -deferred | (836,901 | ) | (231,758 | ) | ||||
Increase in valuation allowance | 836,901 | 231,758 | ||||||
Total income tax expense | $ | - | $ | - |
Schedule of net deferred tax assets | ||||||||
June 30, 2024 (Unaudited) | December 31, 2023 | |||||||
Deferred tax asset | ||||||||
Net operating loss | $ | (2,358,044 | ) | $ | (2,531,144 | ) | ||
Less: valuation allowance | 2,358,044 | 2,531,144 | ||||||
Net deferred tax asset | $ | - | $ | - |
NOTE 15- RELATED PARTY TRANSACTION
On October 22, 2022, Mr. Zhi Yang, the Company founder and CEO subscribed 30,000 for the shares of ESG Inc. stock. The subscription was canceled on September 28, 2023, and the capital received were payable to Mr. Yang. The payable was paid off on February 5, 2024.
million shares of common stock. Mr. Yang paid $
NOTE 16- EQUITY
The Company authorized
shares of common stock at par value of $ and shares of preferred stock at par value $ . shares of common stock were issued and outstanding as of June 30, 2024 and December 31, 2023. There were preferred stock were issued as of June 30, 2024 and December 31, 2023.
NOTE 17- SUBSEQUENT EVENTS
Effective July 31, 2024, the Board of Directors of the Company appointed 4 new Independent Directors to serve on our newly created Audit Committee, Compensation Committee, and Nominating and Governance Committee: James Wallace, Cathy Fleming, Mark Hemmann, and Neal Naito (together, the “New Directors”). Zhi Yang, our Chief Executive Officer, was appointed as Executive Director.
Effective July 31, 2024, we created an Audit Committee. John Wallace, Cathy Fleming, and Mark Hemmann will serve on the Audit Committee, with Mr. Wallace serving as Chair.
Effective July 31, 2024, we created a Compensation Committee. Cathy Fleming, Mark Hemman, and Neal Naito will serve on the Compsensation Committee, with Ms. Fleming serving as Chair.
Effective July 31, 2024, we created a Nominating and Governance Committee. Mark Hemman, Cathy Fleming, and Neal Naito will serve on the Nominating and Governance Committee, with Mr. Hemmann serving as Chair.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
OPERATIONS REVIEW
Net Operating Revenues
Three Months Ended June 30, 2024 versus Three Months Ended June 30, 2023
During the three months ended June, 2024, net operating revenues were $155,901, compared to $205,450 during the three months ended June 30, 2023, a decrease of $49,549 or 24.12%.
Six Months Ended June, 2024 versus Six Months Ended June 30, 2023
During the six months ended June 30 2024, net operating loss were $384,136, compared to $144,872 of net operating income during the six months ended June 30, 2023, a decrease of $529,008, or 3.65%.
The decrease was due to the testing of expanded facility. After the expansion of triple capacity is completed, the Company started testing the expanded facility with one third of capacity in the first quarter, and with one half of capacity in the second quarter, which were 4 full batches of raw materials and others to input. From late July the expansion operates at 3 times of the capacity in 2023. We expect the revenue and gross profit margin will increase when we pass the testing phase in the next quarter.
Gross Profit Margin
Gross profit margin is a ratio calculated by dividing gross profit by net operating revenues. Our gross profit margin decrease to 17.22% for the three months ended June 30, 2024, compared to 19.36% for the three months ended June 30, 2023. Our gross profit margin decreased to 6.99% for the six months ended June 30, 2023, compared to 19.23% for the six months ended June 30, 2023. The decrease was primarily due to the testing phase of expansion facility. We expect commodity costs to have a favorable impact on our gross profit margin during the third quart of 2024 after the expansion operation testing phases out and reaches its full capacity.
Research and Development Expenses
During the three and six months ended June 30, 2024, Research and development expenses decreased $45,567, or 26.15% and decreased $44,683, or 14.68%, respectively, versus the prior year.
Selling, General and Administrative Expenses
During the three and six months ended June, 2024, selling, general and administrative expenses decreased $175,964, or 54.38%, and decreased $131,012, or 21.95%, respectively, versus the prior year. The decrease was mainly due to the increase of foreign currency exchange rate. We signed contracts with two main distributors, who purchase all the products at the site, therefore, the selling expenses were limited.
Interest Expense
During the three months ended June, 2024, interest expense was $132,118, compared to $199,973 during the three months ended June 30, 2023, a decrease of $67,897, or 33.93%. During the six months ended June, 2023, interest expense was $281,605, compared to $349,687 during the six months ended June 30, 2023, a decrease of $67,856 or 33.93%. The decrease was primarily due to the impact of the increase of foreign currency exchange rate.
Other Income and Loss
Other income was mainly asset based grants and income based grants. Other loss was non-operation loss, such as write-off useless raw material. During the three months ended June 30, 2024, other income was $80,540, compared to $75,684 during the three months ended June 30, 2023, an increase of $4,856, or 6.42%. During the six months ended June 30, 2024, other income was negative $15,424, compared to $103,528 during the six months ended June 30, 2023. The decrease was mainly due to $172,098 of raw material write-off.
Income Taxes
The Company recorded no income taxes during the three months and six months ended June 30, 2024 and June 30, 2023, respectively.
LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL POSITION
Cash Flows from Operating Activities
Net cash provided by operating activities during the six months ended June 30, 2024 and June 30, 2023 was $16,808 and $427,181, respectively, a decrease of $410,373, or 96.07%. This decrease was primarily due to the decrease of revenue and the increase of inventories.
Cash Flows from Investing Activities
Net cash used in investing activities during the six months ended June 30, 2024 and June 30, 2023 was $264,441 and $0, respectively. The Company purchased $264,441 of property, plant and equipment during the six months ended June 30, 2024.
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Cash Flows from Financing Activities
Net cash used in financing activities during the six months ended June 30, 2024 and June 30, 2023 was $56,854 and $0, respectively. The Company made payments of debts of $98,370, which included $31,830 of short-term debt and $66,540 of long-term payable and borrowed $41,517 of bank loan during the six months ended June 30,2024.
Off-Balance Sheet Arrangements
There were no off-balance sheet arrangements as of June 30, 2024 and June 30, 2023, or that in the opinion of management that are likely to have, a current or future material effect on our financial condition or results of operations.
Contractual Obligations
None.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide information required by this Item.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
In connection with the preparation of this quarterly report, an evaluation was carried out by the Company’s management, with the participation of the principal executive officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act (“Exchange Act”) as of June 30, 2024. Disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Commission’s rules and forms, and that such information is accumulated and communicated to management, including the principal executive officer, to allow timely decisions regarding required disclosures.
Based on that evaluation, the Company’s management concluded, as of the end of the period covered by this report, that the Company’s disclosure controls and procedures were not effective in recording, processing, summarizing, and reporting information required to be disclosed, within the time periods specified in the Commission’s rules and forms, and that such information was not accumulated and communicated to management, including the principal executive officer and the principal financial officer, to allow timely decisions regarding required disclosures.
Change in Internal Control over Financial Reporting
During the three months ended June 30, 2024, there have been no changes in internal control over financial reporting that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
PART II. Other Information
Item 1. Legal Proceedings
Management has identified certain legal matters where we believe an unfavorable outcome is reasonably estimated. Management believes that the total liabilities of the Company that may arise as a result of currently pending proceedings will not have a material adverse effect on the Company, taken as a whole.
On September 3, 2021, Anhui Daquan Construction Company ("Daquan”) filed a lawsuit against Funan Zhihua Mushroom Co., Ltd. (a merged company, “Zhihua”) on unpaid contractual price of $48,744. Zhihua has a dispute on construction quality which did not meet the requirements specified in the contract and filed a lawsuit for $26,095 of damages. On June 6, 2023, Daquan paid $26,095 to Zhihua to settle the lawsuit.
On November 10, 2022, Funan Yuanlangju Construction Co., Ltd. filed a lawsuit against AUFP for $60,147. The plaintiff sold construction materials to AUFP. AUFP had a dispute with the plaintiff over the amount of the sale. On July 7, 2023, the two parties reached a settlement that AUFP paid the plaintiff $50,740 in 2023.
On December 2, 2022, Liu Pengpeng filed a lawsuit against AUFP for $66,066. Liu Pengpeng signed a contract with AUFP on installation work and drainage construction. Liu Pengpeng breached the contract and failed to complete the construction work on time which caused a loss to AUFP. On July 7, 2023, Liu Pengpeng withdrew the lawsuit. On November 20, 2023, Liu Pengpeng filed a lawsuit for the same claim that was ordered against AUFP in the county court but the courty court’s order was overturned by the immediary court.
Item 1A. Risk Factors
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide information required by this Item.
Item 2. Unregistered Sale of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
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Item 4. Mine Safety Disclosures
Not applicable to our Company.
Item 5. Other Information
None.
Item 6. Exhibits
The following exhibits are included as part of this report by reference:
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ESG INC. | ||
Date: July 31, 2024 | By: | /s/ Zhi Yang |
Name: | Zhi Yang | |
Title: | President and CEO | |
(Principal Executive, Financial and Accounting Officer) |
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