Azio Ai Holdings, Inc.: Form 10-Q for the period ended Jun 30, 2022

The following discussion of our financial condition and the results of operations should be read in conjunction with the unaudited consolidated financial statements and notes thereto included in this Quarterly Report on Form 10-Q (“Quarterly Report”). This discussion contains forward-looking statements that are subject to known and unknown risks, uncertainties, and other factors that may cause our actual results to differ materially from those expressed or implied by such forward-looking statements. These risks, uncertainties, and other factors include, among others, those identified under the “Special Note Regarding Forward-Looking Statements” above, and elsewhere in this Quarterly Report, particularly in Part II, Item 1A “Risk Factors,” below.

Overview

We are a provider of purpose-built zero-emission electric vehicles focused on reducing the total cost of vehicle ownership and helping fleet operators unlock the benefits of green technology. We serve commercial and last-mile fleets, school districts, public and private transportation service companies and colleges and universities to meet the increasing demand for light to heavy-duty electric vehicles. Our vehicles address the challenges of traditional fuel price instability and local, state and federal regulatory compliance.

As discussed in Item 1, Notes 2 and 3 to the unaudited consolidated financial statements contained in this Quarterly Report on Form 10-Q, as a result of the closing of the Merger on March 15, 2021, the historical results discussed in this section of the Quarterly Report on Form 10-Q are those of EVTDS as of June 30, 2022, which include the consolidated balance sheet accounts of Envirotech Vehicles, Inc. (formerly ADOMANI, Inc.) and subsidiaries, and for the fiscal period ended June 30, 2022, which include the consolidated results of operations of EVTDS and Envirotech Vehicles, Inc. (formerly ADOMANI, Inc.) and subsidiaries for the entire three month period. The consolidated financial statements and related disclosures as of March 31, 2021 include the consolidated balance sheet accounts of Envirotech Vehicles, Inc. (formerly ADOMANI, Inc.) and subsidiaries, including EVTDS. The consolidated results of operations for the three months ended March 31, 2021 include the results of operations of EVTDS for the entire period and include the consolidated results of operations of Envirotech Vehicles, Inc. (formerly ADOMANI, Inc.) and subsidiaries for the post-merger period March 16, 2021 through March 31, 2021. On May 26, 2021, the Company filed a Certificate of Amendment of Amended and Restated Certificate of Incorporation of the Company with the Secretary of State of the State of Delaware to change its name from ADOMANI, Inc. to Envirotech Vehicles, Inc., effective as of May 26, 2021.

For the three months ended June 30, 2022 and 2021, we generated sales revenue of $2,087,700 and $188,266, respectively, and our net losses were $1,010,264 and $893,079, respectively. For the six months ended June 30, 2022 and 2021, we generated sales revenue of $3,196,200 and $659,059, respectively, and our net losses were $3,557,661 and $1,551,589, respectively. The 2022 loss includes approximately $1.65 million of non-cash expenses.

Factors Affecting Our Performance

We believe that the growth and future success of our business depend on various opportunities, challenges and other factors, including the following:

COVID-19 pandemic. Global health concerns related to the ongoing COVID-19 pandemic have resulted in social, economic and labor instability in the countries in which we or the third parties with whom we engage operate, and resulted in unexpected legal and regulatory changes, such as travel, social distancing and quarantine policies, boycotts, curtailment of trade, and other business restrictions that have negatively impacted our ability to procure and sell our products and provide our services. Accordingly, our future performance will depend in part upon our ability to successfully respond and adapt to these challenges. We have developed, and continue to develop, plans to address the ongoing effects and help mitigate the potential negative impact of the pandemic on our business.

Availability of government subsidies, rebates and economic incentives. We believe that the availability of government subsidies, rebates, and economic incentives is currently a critical factor considered by our customers when purchasing our zero-emission systems or converting their existing vehicles to zero-emission-electric or hybrids, and that our growth depends in large part on the availability and amounts of these subsidies and economic incentives. As an alternative to being dependent on such funding, however, we are exploring the possibility of leasing our vehicles to our customers as well.

New customers. We are competing with other companies and technologies to help fleet managers and their districts/companies more efficiently and cost-effectively manage their fleet operations. Once these fleet managers have decided they want to buy from us, we still face challenges helping them obtain financing options to reduce the cost barriers to purchasing. We may also encounter customers with inadequate electrical services at their facilities that may delay their ability to purchase from us.

Dependence on external sources of financing of our operations. We have historically depended on external sources for capital to finance our operations. Accordingly, our future performance will depend in part upon our ability to achieve independence from external sources for the financing of our operations.

Investment in growth. We plan to continue to invest for long-term growth. We anticipate that our operating expenses will increase in the foreseeable future as we invest in research and development to enhance our zero-emission electric vehicles and systems; design, develop and manufacture our commercial fleet vehicles and their components; increase our sales and marketing to acquire new customers; and increase our general and administrative functions to support our growing operations. We believe that these investments will contribute to our long-term growth, although they will adversely affect our results of operations in the near term. In addition, the timing of these investments can result in fluctuations in our annual and quarterly operating results.

Zero-emission electric vehicle experience. Our dealer and service network is not currently completely established, although we do have certain agreements in place. One issue they may have, and we may encounter, is finding appropriately trained technicians with zero-emission electric fleet vehicle experience. Our performance will depend on having a robust dealer and service network, which will require appropriately trained technicians to be successful. Because vehicles that utilize our technology are based on a different technology platform than traditional internal combustion engines, individuals with sufficient training in zero-emission electric vehicles may not be available to hire, and we may need to expend significant time and expense training the employees we do hire. If we are not able to attract, assimilate, train or retain additional highly qualified personnel in the future, or do so cost-effectively, our performance would be significantly and adversely affected.

Market growth. We believe the market for all-electric solutions for alternative fuel technology, specifically all-electric vehicles, will continue to grow as more purchases of new zero-emission vehicles and as more conversions of existing fleet vehicles to zero-emission vehicles are made. However, unless the costs to produce such vehicles decrease dramatically, purchases of our products will continue to depend in large part on financing subsidies from government agencies. We cannot be assured of the continued availability, the amounts of such assistance to our customers, or our ability to access such funds.

Sales revenue growth from additional products. We seek to add to our product offerings additional zero-emission vehicles of all sizes to be marketed, sold, warrantied and serviced through our developing distribution and service network, as well as add other ancillary products discussed elsewhere in this report.

Third-party contractors, suppliers and manufacturers. We rely upon third parties to supply us with raw materials, parts, components and services in adequate quantity in a timely manner and at reasonable prices, quality levels, and volumes acceptable to us.

Components of Results of Operations

Sales

Sales are recognized from the sales of new, purpose-built zero-emission electric vehicles and from providing vehicle maintenance and safety inspection services. Sales are recognized in accordance with Accounting Standards Codification (“ASC”) Topic 606, as discussed in Note 2 to our unaudited consolidated financial statements included in this Quarterly Report.

Cost of Sales

Cost of sales includes those costs related to the development, manufacture, and distribution of our products. Specifically, we include in cost of sales each of the following: material costs (including commodity costs); freight costs; labor and other costs related to the development and manufacture of our products; and other associated costs. Cost of sales also includes costs related to the valuation of inventory due to impairment, obsolescence, or shrinkage.

General and Administrative Expenses

Selling, general and administrative expenses include all corporate and administrative functions that support our company, including personnel-related expense and stock-based compensation costs; costs related to investor relations activities; warranty costs, including product recall and customer satisfaction program costs; consulting costs; marketing-related expenses; and other expenses that cannot be included in cost of sales.

Consulting and Research and Development Costs

These expenses are related to our consulting and research and development activity.

Other Income/Expenses, Net

Other income/expenses include non-operating income and expenses, including interest income and expense.

Provision for Income Taxes

We account for income taxes in accordance with Financial Accounting Standards Board (“FASB”) ASC 740 “Income Taxes,” which requires the recognition of deferred income tax assets and liabilities for the future tax consequences attributable to differences between the financial statements carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under FASB ASC 740, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period the enactment occurs. A valuation allowance is provided for certain deferred tax assets if it is more likely than not that we will not realize tax assets through future operations. Because we have incurred only losses to this point, no provision for income taxes has been made in 2022.

Results of Operations

The following discussion compares operating data for the three and six months ended June 30, 2022 to the corresponding periods ended June 30, 2021:

Sales

Sales were $2,087,700 and $188,266 for the three months ended June 30, 2022 and 2021, respectively, and $3,196,200 and $659,059 for the six months ended June 30, 2022 and 2021, respectively. Sales for the three months ended June 30, 2022 consisted of three cargo vans sold to factory authorized representatives, one cargo van sold to a dealer and 11 cargo vans sold primarily to customers in New Jersey who utilized a voucher from the NJ Zip program, three cab and chassis trucks and three resale buses were also sold. Sales for the six months ended June 30, 2022 consisted of the sales in the second quarter plus 10 cargo vans sold to factory authorized representatives and two vans sold to the Newark Public Library in New Jersey who utilized a voucher from the NJ Zip program. Sales attributable to higher vehicle selling price were $317,150 and $192,736 for the three and six months ended June 30, 2022, respectively.

Cost of Sales

Cost of sales were $1,260,480 and $147,932 for the three months ended June 30, 2022 and 2021, respectively, and $1,952,042 and $461,366 for the six months ended June 30, 2022 and 2021, respectively. Cost of sales for the three and six months ended June 30, 2022 and 2021 consisted of the costs related to the sale of the vehicles sold as described above and for the costs of providing maintenance and inspection services.

General and Administrative Expenses

General and administrative expenses were $1,646,136 and $836,246 for the three months ended June 30, 2022 and 2021, respectively, an increase of $809,890. The increase was primarily due to $389,036 of professional fees mostly legal fees; to $199,640 of increased payroll expense; to contract labor costs of $95,062 primarily related to engineering and technical assistance; to advertising and marketing expenses of $75,923; to insurance costs of $52,568; and to travel and related expenses of $62,000 related primarily to tradeshows; and to increases in other general and administrative expenses of $12,780. These increases were partially reduced by a reduction in rents of $77,117 compared to the 2021 period. The second quarter 2022 general and administrative expenses include $18,948 non-cash depreciation expense. The general and administrative expenses for the three months ended June 30. 2021 included non-cash depreciation expense of $27,380.

General and administrative expenses were $4,522,984 and $1,422,149 for the six months ended June 30, 2022 and 2021, respectively, an increase of $3,100,835. The increase was primarily related to $1,614,845 non-cash stock-based compensation expense recorded with respect to the stock options granted during the first quarter of 2022 compared to no similar expense recorded during the 2021 period. Other increases were due to payroll-related expenses of $542,409; to professional fees of $229,082 mostly legal fees; to contract labor costs of $190,917 primarily related to engineering and technical assistance; to advertising and marketing expenses of $169,073; to travel and related expenses of $139,959 related primarily to finalizing logistics and moving into the Osceola, Arkansas manufacturing location and tradeshows; to insurance costs of $135,402; and to increases in other general and administrative expenses of $163,983. These increases were partially reduced by a reduction in rents of $84,835 compared to the 2021 period. The general and administrative expenses for the six months ended June 30, 2022 include $1,652,453 in non-cash charges, with depreciation expense of $37,608 being added to the stock-based compensation expense discussed above. The general and administrative expenses for the six months ended June 30. 2021 included non-cash depreciation expense of $35,576.

Consulting Expenses

Consulting expenses were $99,518 and $95,108 for the three months ended June 30, 2022 and 2021, respectively, and $170,318 and $105,358 for the six months ended June 30, 2022 and 2021, respectively. The increase in the current year period was due primarily to payments to an Arkansas state relationship and incentive consulting firm that assisted the Company in securing the manufacturing facility in Osceola, Arkansas and to the cost of the ASC 805 valuation report related to the Merger.

Research and Development Expenses

Research and development expenses were $87,412 for the three and six months ended June 30, 2022 and no expense for the three and six months ended June 30, 2021. The increase in the current year period was due to the development of a new product lines.

Cash Flows

The following table summarizes our cash flows from operating, investing, and financing activities for the six months ended June 30, 2022 and 2021:

Operating Activities

Cash (used in) operating activities is primarily the result of our operating losses, reduced by the impact of non-cash expenses, including non-cash stock-based compensation, and changes in the asset and liability accounts.

Net cash used in operating activities for the six months ended June 30, 2022 was $6,626,388 versus net cash used in operating activities of $6,817,467 for the six months ended June 30, 2021, a decrease of $191,079. The decrease in net cash used in operating activities was due to a decrease in prepaid expenses of $2,235,846, an increase in non-cash expenses of $1,617,077 (primarily stock-based compensation expense of $1,614,845), a reduction in decreased accrued liabilities of $1,470,482, and a decrease in inventory deposits of $276,983. These uses of cash were partially offset by an increase in net loss of $1,992,574, an increase in accounts receivable of $2,967,461, and an increase in inventory additions of $547,937.

We expect cash used in operating activities to fluctuate significantly in future periods as a result of a number of factors, some of which are outside of our control, including, among others: the success we achieve in generating revenue; the success we have in helping our customers obtain financing to subsidize their purchases of our products; our ability to efficiently develop our dealer and service network; the costs of batteries and other materials utilized to make our products; the extent to which we need to invest additional funds in research and development; and the amount of expenses we incur to satisfy future warranty claims.

Investing Activities

Net cash provided by investing activities during the six months ended June 30, 2022 increased by $14,753,364 to $5,943,620, as compared to cash used in investing activities of $8,809,744 during the six months ended June 30, 2021. The increase in net cash provided by investing activities during the six months ended June 30, 2022 is primarily due to a decrease in investments in marketable securities of $9,996,091 and the increased sale of marketable securities of $8,000,000, partially offset by the absence in 2022 of the $3,373,332 cash acquired in merger in 2021.

Financing Activities

Net cash provided by financing activities during the six months ended June 30, 2022 decreased by $22,132,524 to $106,755 from cash provided by financing activities in 2021 of $22,239,279. The decrease consisted primarily of the pre-merger $6,415,110 proceeds from the issuance of common stock raised by EVTDS in 2021 in anticipation of the Merger and a second common stock offering post-merger which raised $16,322,049 versus $120,000 raised in 2022 from the issuance of stock for stock options that were exercised. The 2021 cash provided was reduced by offering costs of $188,015; there were no offering costs incurred in the 2022 quarter. The proceeds from the issuance of common stock were further reduced in 2022 by the Company making installment payments on its debt, and in 2021 by EVTDS repaying their SBA EIDL loan in the amounts $309,865.

Liquidity and Capital Resources

As of June 30, 2022, we had cash and cash equivalents of $4,270,421 and marketable securities of $2,002,472, a combined total of $6,272,894 and working capital of approximately $20.0 million. We believe that our existing cash, cash equivalents and marketable securities will be sufficient to fund our operations during the next twelve months and beyond. However, we may not successfully execute our business plan, and if we do not, we may need additional capital to continue our operations and support the increased working capital requirements associated with the fulfillment of purchase orders.

On February 2022, the Company announced Osceola, Arkansas as the site of its state-of-the-art manufacturing facility and new corporate offices. The Company has moved into an approximately 580,000 square foot facility and is currently in final stages of due diligence and contract negotiation with the City of Osceola and the Arkansas Economic Development Commission. However, additional debt and/or equity capital will be required in order to purchase related equipment and set up production lines and is expected to require up to $80 million of additional investment through 2027. Investments and employee hiring requirements over the next 10 years will provide an opportunity for the Company to obtain local tax incentives granted to the Company of up to $27 million, provided that the qualifying expenditures are made. The Company is not currently contractually obligated to make the expenditures.

Line of Credit

Effective August 4, 2022, EVT secured a line of credit from Centennial Bank. Borrowings under the line of credit bears interest of 5.9% annually. There is no maturity date for the line, but Centennial Bank may at any time, in its sole discretion and without cause, demand the Company immediately repay any and all outstanding obligations under the line of credit in whole or in part. The line is secured by the cash and cash equivalents maintained by the Company in its Centennial Bank accounts. Borrowings under the line may not exceed $1,000,000 of such cash, cash equivalents, and marketable securities balances. There was no principal amount outstanding on June 30, 2022 and there is no current plan to borrow from it.

Capital Expenditures

We do not have any contractual obligations for ongoing capital expenditures at this time. We do, however, purchase equipment necessary to conduct our operations on an as needed basis and will begin increasing those expenditures as the Company transfers assembly and corporate functions to the newly announced Osceola Arkansas facility.

Contractual Obligations

Other than as disclosed in the unaudited consolidated financial statements in Item 1 of this Quarterly Report on Form 10-Q for the three and six months ended June 30, 2022, the Company has no contractual obligations.

Critical Accounting Policies and Significant Judgments and Estimates

Our condensed consolidated financial statements are prepared in accordance with AAP. The preparation of our condensed consolidated financial statements and related disclosures requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, costs and expenses, and the disclosure of contingent assets and liabilities in our financial statements. We base our estimates on historical experience, known trends and events and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions.

We define our critical accounting policies as those accounting principles generally accepted in the United States of America that require us to make subjective estimates and judgments about matters that are uncertain and are likely to have a material impact on our financial condition and results of operations as well as the specific manner in which we apply those principles.

Emerging Growth Company and Smaller Reporting Company Status

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act, or JOBS Act, and may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including reduced disclosure about our executive compensation arrangements, exemption from the requirements to hold non-binding advisory votes on executive compensation and golden parachute payments and exemption from the auditor attestation requirement in the assessment of our internal control over financial reporting. We may take advantage of these exemptions until the last day of the fiscal year following the fifth anniversary of our initial public offering or until such earlier time that we are no longer an “emerging growth company.”

We are also a “smaller reporting company” as defined in Rule 12b-2 under the Exchange Act. We may continue to be a smaller reporting company if either (i) the market value of our shares held by non-affiliates is less than $250 million or (ii) our annual revenue is less than $100 million during the most recently completed fiscal year and the market value of our shares held by non-affiliates is less than $700 million as of the last business day of our most recently completed second fiscal quarter. If we are a smaller reporting company at the time we cease to be an emerging growth company, we may continue to rely on exemptions from certain disclosure requirements that are available to smaller reporting companies.

We are exposed to market risks in the ordinary course of our business. We do not currently face material market risks such as interest rate fluctuation risk and foreign currency exchange risk. Our cash and cash equivalents include cash in readily available checking and money market accounts. These investments are not dependent on interest rate fluctuations that may cause the principal amount of these investments to fluctuate, and we do not expect such fluctuation will have a material impact on our financial conditions. If we issue additional debt in the future, we will be subject to interest rate risk. The majority of our expenses are denominated in the U.S. dollar.

We may face risks associated with the costs of raw materials, primarily batteries, as we go into production. To the extent these and other risks materialize, they could have a material effect on our operating results or financial condition. We currently anticipate that our international selling, marketing and administrative costs related to foreign sales, if any, will be largely denominated in United States dollars, which may create foreign currency exchange risk exposure.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this Quarterly Report. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures (a) were not effective to ensure that information that we are required to disclose in reports that we file or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and (b) include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

Due to the staff reductions and voluntary resignations, we experienced beginning in the fourth quarter of 2020 and continuing through the date of this filing, we increased our reliance on outsourced accounting help during such periods and for all periods thereafter through the date of this filing. As a result of such changes, we have been unable to maintain the levels of segregation of duties during such periods at the levels of prior periods, and such changes to our disclosure controls and procedures have significantly affected our internal control over financial reporting during the three months ended June 30, 2022. We have yet to fully resolve such deficiencies as of the date of this filing. We have engaged, and continue to seek additional, experienced accounting professionals with relevant expertise to provide additional accounting services intended to supplement our efforts and mitigate the negative effects of such recent changes to our disclosure controls and procedures.

Limitations on Effectiveness of Controls and Procedures

In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, cannot provide absolute assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints, and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs. Similarly, an evaluation of controls cannot provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected.

There were no material changes from the risk factors previously disclosed in the audited financial statements of Envirotech Vehicles, Inc. for the year ended December 31, 2021 as described in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the SEC on April 26, 2022.