Common stock, $0.001 par value, 65,000,000 authorized, 25,899,468 issued and outstanding as of September 30, 2024 and December 31, 2023, respectively.
25,900
25,900
Additional paid in capital
11,152,388
11,152,388
Accumulated comprehensive income (loss)
(435,822
)
(430,206
)
Accumulated deficit
(1,708,434
)
(1,224,811
)
Equity Attributable to stockholders of ESG Inc.
9,034,032
9,523,271
Equity attributable to noncontrolling interest
3,071,325
3,274,308
Total Equity
12,105,357
12,797,579
Total Liabilities and Stockholders' Equity
27,131,421
26,273,652
The accompanying notes are an integral part
of these consolidated financial statements.
-1-
ESG INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE
INCOME (LOSS)
(Unaudited)
For the three months ended
For the nine months ended
September 30, 2024
September 30, 2023
September 30, 2024
September 30, 2023
Revenues
2,234,549
518,192
7,122,611
5,959,055
Cost of goods sold
1,725,979
101,859
6,272,487
4,496,465
Gross Profit
508,570
416,333
850,123
1,462,590
Research and development cost
144,582
152,839
404,366
457,306
Selling expenses
2,292
1,263
4,776
1,863
General and administrative expense
239,656
279,953
703,078
876,271
Operating Income
122,041
(17,722
)
(262,096
)
127,150
Interest (expense)
(125,380
)
62,553
(406,985
)
(287,134
)
Other Income (loss)
(180
)
29,652
(15,605
)
133,180
Income (loss) before Income Taxes
(3,521
)
74,483
(684,686
)
(26,804
)
Income taxes
-
-
-
-
Consolidated net Income (loss)
(3,521
)
74,483
(684,686
)
(26,804
)
Less: Net income (loss) attributable to noncontrolling interest
(26,218
)
28,829
(201,063
)
13,337
Net Income (Loss) Attributable to Shareholders of ESG Inc.
22,697
45,654
(483,623
)
(40,141
)
Other comprehensive items
Foreign currency translation gain (loss) attributable to ESG Inc.
161,997
(191,087
)
(5,616
)
(562,011
)
Foreign currency translation gain (loss) attributable to noncontrolling interest
55,390
(65,336
)
(1,920
)
(192,165
)
Total comprehensive income (loss) attributable to noncontrolling interest
29,173
(36,507
)
(202,983
)
(602,152
)
Total comprehensive Income (loss) Attributable to Shareholders of ESG Inc.
184,693
(145,433
)
(489,239
)
(178,828
)
Net income loss per share - basic and diluted
0.01
(0.01
)
(0.02
)
(0.01
)
Weighted average shares outstanding - basic and diluted
25,899,468
25,899,468
25,899,468
25,899,468
The
accompanying notes are an integral part of these consolidated financial statements.
-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 income
-
-
-
81,347
-
81,347
22,976
104,323
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
Net income (loss)
-
-
-
22,697
-
22,697
(26,218
)
(3,521
)
Foreign currency translation adjustment
-
-
-
-
161,997
161,997
55,390
217,387
Balance at September 30, 2024
25,899,468
$
25,900
$
11,152,388
$
(1,708,434
)
$
(435,822
)
$
9,034,032
$
3,071,325
$
12,105,357
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 adjustment
-
-
-
-
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 income
-
-
-
56,553
-
56,553
24,608
81,161
Foreign currency translation adjustment
-
-
-
-
(413,983
)
(413,983
)
(141,551
)
(555,534
)
Balance at June 30, 2023
25,899,468
25,900
11,152,388
(985,893
)
(519,514
)
9,672,881
3,295,809
12,968,690
Net income
-
-
-
45,654
-
45,654
28,829
74,483
Foreign currency translation adjustment
-
-
-
-
(191,087
)
(191,087
)
(65,336
)
(256,423
)
Balance at September 30, 2023
25,899,468
$
25,900
$
11,152,388
$
(940,239
)
$
(710,601
)
$
9,527,448
$
3,259,302
$
12,786,750
The accompanying notes are an integral part
of these consolidated financial statements.
-3-
ESG INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
（Unaudited)
For The Nine Months Ended
September 30, 2024
September 30, 2023
Cash flows from operating activities:
Net loss
$
(684,686
)
$
(26,804
)
Adjustments to reconcile loss to net cash used in operating activities:
Depreciation and amortization
1,362,759
1,092,743
Loss on obsolete inventories
201,480
-
Changes in assets and liabilities:
Accounts receivable and other receivable
(131,305
)
(140,022
)
Advance to suppliers
(1,042,212
)
(618,092
)
Inventory
(218,401
)
459,850
Value added tax receivable
(168,859
)
-
Note receivable
41,848
17,010
Accounts payable
1,281,062
274,887
Payable to related party
(30,000
)
8,689
Accrued expenses and other payables
436,811
(33,776
)
Deferred income
(97,493
)
(59,569
)
Net cash provided by operating activities
951,005
974,916
Cash flows from investing activities:
Acquisition of fixed assets
(385,337
)
-
Net cash used in investing activities
(385,337
)
-
Cash flows from financing activities:
Proceeds from loans
427,460
-
Payment of debt
(470,206
)
(710,969
)
Net cash used in financing activities
(42,746
)
(710,969
)
Effect of exchange rate changes on cash
(420,429
)
(305,480
)
Net increase (decrease) in cash
102,493
(41,533
)
Cash, beginning of the period
342,342
206,621
Cash, end of the period
$
444,835
$
165,088
Supplemental disclosures of cash flow information:
Cash paid for interest
$
406,985
$
287,134
Cash paid for income tax
$
-
$
-
The accompanying notes are an integral part
of these consolidated financial statements.
-4-
ESG INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2024
(Unaudited)
NOTE 1- ORGANIZATION AND DESCRIPTION OF BUSINESS
ESG Inc. (“ESG”) was incorporated in July 2021 as a Nevada
corporation and headquartered at Kennett Square, PA, USA. ESG 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.
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 10,432,800 of
ESG shares. Following this transaction, AUFP became a 74.52% subsidiary of ESG through Hainan ESG.
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 mushrooms 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.
-5-
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 $3,071,325and $3,274,308 as of September
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.
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 September 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 September 30, 2024 and December 31, 2023, advance to suppliers was $1,208,222 and $166,010, respectively and allowance for doubtful
accounts was nil and nil, respectively.
-6-
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.
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.
Customer concentration
Schedule customer concentration
For the Three Months Ended September 30, (Unaudited)
For the Nine Months Ended September 30, (Unaudited)
2024
2023
2024
2023
Customer A
25
%
21
%
17
%
20
%
Customer B
37
%
-
20
%
-
Customer C
19
%
-
20
%
-
Customer D
16
%
-
15
%
-
Customer E
-
43
%
-
42
%
-7-
Deferred income
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. Deferred income consists primarily of government grants related
to depreciable assets. Government grants received relating to depreciable assets are recorded as deferred income and recognized in over
the life of the related assets. Company records 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. As of September 30, 2024
and December 31, 2023, deferred income was $1,271,088 and $1,355,552, respectively.
Research and development expenses
Research and development expenses are expensed in the period when incurred.
These costs primarily consist of cost of materials used, salaries paid for the Company’s development department, and fees paid to
the third parties. The research and development expenses were $144,582 and $152,839 for the three months ended September 30, 2024
and 2023, respectively. The research and development expenses were $404,366 and $457,306 for the nine months ended September 30,
2024 and 2023, respectively.
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 $3,071,325 and $3,274,308 of equity were attributable to noncontrolling interest as of September
30, 2024 and December 31, 2023, respectively. During the three months ended September 30, 2024 and 2023, the Company had net loss of $26,218 and
net income of $28,829, respectively, attributable to the noncontrolling interest. The Company had net loss of $201,063 and net income
of $13,337, respectively, attributable to the noncontrolling interest for the nine months ended September 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
September 30, 2024
September 30, 2023
December 31, 2023
Period-end date USD: RMB exchange rate
7.0182
7.2952
7.0797
Average USD for the reporting period: RMB exchange rate
7.1773
7.0327
7.0750
-8-
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.
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. At September 30, 2024, the Company had negative working capital of $9,957,879. The Company had an accumulated
deficit of approximately $1,708,434and $1,224,811 as of September 30, 2024 and December 31, 2023, respectively. For nine month ended
September 30, 2024, the Company had losses of $684,686 and $26,804, respectively. These factors among others raise substantial doubt about
the ability of the Company to continue as a going concern for a reasonable period of time.
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 revenues 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
September 30,
2024
(Unaudited)
December 31,
2023
Accounts receivable
$
106,267
$
-
Other receivable
104,259
79,221
Total
$
210,526
$
79,221
-9-
NOTE 5- PROPERTY, PLANT AND EQUIPMENT
The following table summarizes our property, plant and equipment:
Schedule of property and equipment
September 30,
2024
(Unaudited)
December 31,
2023
Buildings and improvements
$
16,459,599
$
16,276,614
Machinery, equipment and vehicle fleet
9,079,406
8,597,430
Construction in progress
21,926
21,682
Property, plant and equipment - cost
25,560,931
24,895,726
Less: Accumulated depreciation
(7,612,223
)
(6,200,757
)
Property, plant and equipment - net
$
17,948,708
$
18,694,969
For the three months ended September 30, 2024 and 2023, depreciation
expenses were $444,538 and $364,247, respectively. For the nine months ended September 30, 2024 and 2023, depreciation expenses were
$1,312,054 and $1,040,765, respectively.
NOTE 6- INVENTORIES
Inventories consisted of the following:
Schedule of inventories
September 30,
2024
December 31,
(Unaudited)
2023
Raw materials
$
1,733,520
$
1,516,634
Finished goods
-
-
Work in progress - compost
91,342
90,326
- growing mushrooms
44,915
44,416
Total
$
1,869,777
$
1,651,376
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
September 30,
2024
(Unaudited)
December 31,
2023
Land use right
$
3,365,401
$
3,327,987
Software
7,787
7,701
Patent
7,124
7,045
Subtotal
3,380,313
3,342,733
Less: Accumulated amortization
(311,799
)
(256,827
)
Total
$
3,068,514
$
3,085,906
Amortization expenses were $18,288 and $17,594, respectively for
the three months ended September 30, 2024 and 2023, respectively, $50,705 and $51,978 for the nine months ended September 30, 2024
and 2023, respectively.
-10-
Estimated future amortization expense is as follows as of September
30, 2024:
Schedule of estimated future amortization expense
Years ending December 31,
Amortization expense
2024
73,151
2025
73,151
2026
73,151
2027
73,151
2028
73,151
Thereafter
2,702,759
Total
3,068,514
NOTE 8- BANK LOANS
Short-term bank loans consisted of the following:
Schedule of short-term bank loans
September 30, 2024
(unaudited)
Interest
rate
Due date
December 31,
2023
Interest
rate
Due date
Agricultural Bank of China Funan Branch
$
812,174.06
4.50
%
4/06/25
$
845,416
3.70
%
4/10/24
Anhui Funan Rural Commercial Bank
1,994,813
5.60
%
12/22/24
1,972,637
5.90
%
12/22/24
Anhui Funan Rural Commercial Bank
854,920
5.60
%
3/28/25
1,409,026
5.90
%
3/28/24
Anhui Funan Rural Commercial Bank
1,424,867
5.60
%
1/25/25
845,416
5.90
%
1/25/24
Industrial and Commercial Bank of China, Funan (1)
712,433
3.45
%
10/12/24
704,513
3.45
%
10/12/24
Bank of China Funan Branch (2)
1,139,893
3.60
%
3/13/25
1,127,220
3.60
%
3/13/25
Total
$
6,939,101
-
-
$
6,904,228
-
-
(1) $712,433 and $704,513 of loans from Industrial
and Commercial Bank of China, Funan were pledged by fixed assets as of September 30, 2024 and December 31, 2023, respectively.
(2) $1,139,893 and $1,127,220 of loans from Bank
of China were pledged by fixed assets as of September 30, 2024 and December 31, 2023, respectively.
(1)
$712,433 and $704,513 of loans from Industrial
and Commercial Bank of China, Funan were pledged by fixed assets as of September 30, 2024 and December 31, 2023, respectively.
(2)
$1,139,893 and $1,127,220 of loans from Bank
of China were pledged by fixed assets as of September 30, 2024 and December 31, 2023, respectively.
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
September 30, 2024
December 31,
(Unaudited)
2023
Advances from customers
$
120,674
$
63,867
Salary payable
105,099
181,950
Tax payable
13,951
16,131
Other payable
2,509,859
2,050,824
Total
$
2,749,583
$
2,312,772
Other payable was primarily comprised of loans from non-bank institutions
and deposit from customers. Loans included $284,973 and $281,805 from Funan Agricultural Investment Co. Ltd as of September 30, 2024
and December 31, 2023, respectively and $1,424,867 and $1,409,026 from Funan Small Business financing service center as of September
30, 2024 and December 31, 2023, respectively.
-11-
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 September 30, 2024 and December 31, 2023, VAT input was $2,380,839 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 would 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. The lawsuit was settled in September, 2024.
NOTE 13- OTHER INCOME (LOSS)
Other income (loss) consists of incomes from government grants and
losses from obsolete inventory write-offs:
Schedule of other income loss
For the three months ended September 30, (Unaudited)
For the nine months ended September 30, (Unaudited)
2024
2023
2024
2023
Asset-based grant
$
29,084
29,652
$
97,493
133,180
Income-based grant
-
-
88,382
-
Total income from government grants
29,084
29,652
185,875
133,180
Loss on obsolete inventory write off
(29,264
)
-
(201,480
)
-
Other income (loss)
$
(180
)
29,652
$
(15,605
)
133,180
-12-
NOTE 14- INCOME TAXES
The Company recorded no income taxes for the three and nine months
ended September 30, 2024 and 2023. Net income and net loss were not offset among the operating subsidiaries. Net income of $584,785 and
$563,375 were exempt from income tax for the three months ended September 2024 and 2023, respectively. Net income of $1,131,025 and
$1,647,017 were exempt from income tax for the nine months ended September 30, 2024 and 2023, respectively.
The following table reconciles the U.S. statutory rates to the Company’s
effective tax rate for the three and nine months ended September 30, 2024 and 2023:
Schedule of effective tax rates
For the three months ended
September 30,
2024
September 30, 2023
(Unaudited)
(Unaudited)
US federal statutory rates
-21
%
-21
%
Tax rate difference between PRC and U.S.
-4
%
-4
%
Effect of income tax exemption on certain income
-141
%
-170
%
Change in valuation allowance
166
%
195
%
Effective tax rate
$
-
$
-
For the nine months ended
September 30,
2024
September 30,
2023
(Unaudited)
(Unaudited)
US federal statutory rates
(21
%)
(21
%)
Tax rate difference between PRC and U.S.
(4
%)
(4
%)
Effect of income tax exemption on certain income
(29
%)
(1206
%)
Change in valuation allowance
54
%
1231
%
Effective tax rate
$
-
$
-
The provision for income tax expense (benefit) for the nine months
ended September 30, 2024 and 2023 consisted of the following:
Schedule of income tax expense (benefit)
For the nine months ended
September 30, 2024
September 30, 2023
(Unaudited)
(Unaudited)
Income tax expense - current
$
-
$
-
Income tax benefit -deferred
(374,704
)
(371,072
)
Increase in valuation allowance
374,704
371,072
Total income tax expense
$
-
$
-
Schedule of net deferred tax assets
September, 30, 2024
(Unaudited)
December 31, 2023
Deferred tax asset
Net operating loss
$
(2,905,848
)
$
(2,531,144
)
Less: valuation allowance
2,905,848
2,531,144
Net deferred tax asset
$
-
$
-
-13-
NOTE 15- RELATED PARTY TRANSACTION
On October 22, 2022, Mr. Zhi Yang, the Company founder and CEO subscribed 12 million
shares of common stock. Mr. Yang paid $30,000 for the 12,000,000 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.
NOTE 16- EQUITY
The Company authorized 65,000,000 shares of common stock
at par value of $0.001 and 10,000,000 shares of preferred stock at par value $0.001. 25,899,468 shares of common stock
were issued and outstanding as of September 30, 2024 and December 31, 2023. There were no preferred stock were issued as of
September 30, 2024 and December 31, 2023.
NOTE 17- SUBSEQUENT EVENTS
The Company has evaluated subsequent events through the filing of this
Quarterly Report on Form 10-Q, and determined that there have been no events that have occurred that would require adjustments to our
disclosures in the consolidated financial statements
-14-
Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
OPERATIONS REVIEW
Net Operating Revenues
Three Months Ended September 30, 2024 versus Three Months Ended
September 30, 2023
During the three months ended September 30, 2024, net operating revenues
were $122,041, compared to net loss of $17,722 during the three months ended September 30, 2023, an increase of $139,763 or 789%.
Nine Months Ended September 30, 2024 versus nine Months Ended
September 30, 2023
During the nine months ended September 30 2024, net operating loss
was $262,096, compared to $127,150 of net operating income during the nine months ended September 30, 2023, a decrease of $389,246, or
306%.
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. From late July the expansion operates at
3 times of the capacity in 2023. We passed the testing phase this quarter and We expect the revenue and gross profit margin will increase
in the fourth quarter.
Gross Profit Margin
Gross profit margin is a ratio calculated by dividing gross profit
by net operating revenues. Our gross profit margin increased to 22.76% for the three months ended September 30, 2024, compared to 80.34%
for the three months ended September 30, 2023. Our gross profit margin decreased to 11.94% for the nine months ended September 30,
2024, compared to 24.54% for the nine months ended September 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 fourth quart of 2024 after the expansion
operation testing phases out and reaches its full capacity.
Research and Development Expenses
During the three months ended September 30, 2024, Research and development
expenses decreased $8,257, or 5.40%, compared to $416,333 for the three months ended September 30, 2023. During the nine months ended
September 30, 2024, Research and development expenses decreased $52,940, or 11.58%, compared to $457,306 for the nine months ended September
30, 2023. The difference was mainly due to the increase of currency exchange rate used to translate financial statements.
Selling, General Administrative Expenses
During the three months ended September, 2024, selling expenses
increased $1,029, or 81.45%, compared to $1,263 for the three months ended September 30, 2023. During the three months ended
September 30, 2024, general and administrative expenses decreased $40,297, or 14.39%, compared to $279,953 for the three months
ended September 30, 2023. During the nine months ended September 30, 2024, selling expenses increased $2,913, or 156%, compared to
$1,863, general and administrative expenses decreased $173,193, or 19.77%, compared to $876,271 for the nine months ended September
30, 2023. The decrease was mainly due to the decrease of professional fee and the fluctuation of foreign currency exchange rate.
Interest Expense
During the three months ended September 30, 2024, interest expense
was decreased $187,933 or 300%, compared to negative $62,533 during the three months ended September 30, 2023. Negative $62,533 of interest
expense was due to the interest forgiveness by the loaner during the three months ended September 30, 2023. During the nine months ended
September 30, 2024, interest expenses were decreased $119,851, or 41.74%, compared to $287,134 during the nine months ended September
30, 2023. The decrease was primarily due to the impact of the reduce of loans and interest forgiveness.
-15-
Other income (loss)
During the three months ended September 30, 2024, other loss was
$180, compared to $29,652 of net income during the three months ended September 30, 2023, a decrease of $29,832, or 101%. During the
nine months ended September 30, 2024, other loss was $15,605, compared to $133,180 of net income during the nine months ended
September 30, 2023. The decrease was mainly due to $29,246 and $201,480 of raw material write-off during the three and nine months
ended September 30, 2024, respectively.
Income Taxes
The Company recorded no income taxes during the three and nine months
ended September 30, 2024 and 2023, respectively.
LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL POSITION
Cash Flows from Operating Activities
Net cash provided by operating activities during the nine months ended
September 30, 2024 and 2023 was $951,005 and $974,916, respectively, a decrease of $23,911, or 2.45%. This decrease was primarily due
to the decrease of revenue.
Cash Flows from Investing Activities
Net cash used in investing activities during the nine months ended
September 30, 2024 and 2023 was $385,337 and $0, respectively. The increase was due to the purchase of production machine.
Cash Flows from Financing Activities
Net cash used in financing activities during the nine months
ended September 30, 2024 and 2023 was $42,746 and $710,969, respectively. The Company made debt payment of $470,206 and borrowed
$427,460 during the nine months ended September 30, 2024. The Company paid off $710,969 of debt during the nine months ended
September 30, 2023.
Off-Balance Sheet Arrangements
There were no off-balance sheet arrangements as of September 30, 2024
and 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 September 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 September 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.
-16-
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. The lawsuit was settled in September, 2024.
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.
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:
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: November 13, 2024
By:
/s/ Zhi Yang
Name:
Zhi Yang
Title:
President and CEO
(Principal Executive, Financial and Accounting Officer)
