Azio Ai Holdings, Inc.: Form 10-Q for the period ended Jun 30, 2024

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”) and the audited financial statements and notes thereto included in our Annual Report on Form 10-K filed with the SEC on March 28, 2024. 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 in this Quarterly Report.

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.

For the three months ended June 30, 2024 and 2023 , we generated sales revenue of $812,770 and $2,132,880, respectively, and our net loss for the three months ended June 30, 2024 and June 30, 2023 was $755,092 and $1,254,029, respectively. Included in our net loss for the three months ended June 30, 2024 is a non-cash unrealized gain on financial instruments of $570,519.

For the six months ended June 30, 2024 and 2023 , we generated sales revenue of $1,623,260 and $2,656,079, respectively, and our net loss for the six months ended June 30, 2024 and June 30, 2023 was $5,287,455 and $3,521,937, respectively. Included in our net loss for the six months ended June 30, 2024 is a non-cash unrealized loss on financial instruments of $999,408.

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:

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 with helping them to 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 of 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 continue increasing for 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, purchasers 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 ASC 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; 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 (Expense)Income, Net

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

Provision for Income Taxes

We account for income taxes in accordance with ASC 740 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 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 2024.

Results of Operations

The following discussion compares our results of operations for the three and six months ended June 30, 2024 to the corresponding periods ended June 30, 2023:

Sales

Sales for the three months ended June 30, 2024 and 2023 were $812,770 and $2,132,880, respectively. Sales for the three months ended June 30, 2024 consisted primarily of five logistics cargo vans, one cab and chassis truck, one electric sweeper and one passenger van. Sales for the three months ended June 30, 2023 consisted of 19 logistics cargo vans and one cab and chassis truck. The decrease in sales was primarily due to among other things, lower number of units sold, unfavorable product mix and less favorable market conditions in 2024 as compared to 2023.

Sales for the six months ended June 30, 2024 and 2023 were $1,623,260 and $2,656,079, respectively. Sales for the six months ended June 30, 2024 consisted primarily of 11 logistics cargo van, three cab and chassis trucks, one passenger van, two zippers, one sweeper and one forklift. Sales for the six months ended June 30, 2023 consisted of 25 logistics cargo vans and one cab and chassis truck. The decrease in sales was primarily due to among other things, lower number of units sold, unfavorable product mix and less favorable market conditions in 2024 as compared to 2023.

Cost of Sales

Cost of sales for the three months ended June 30, 2024 and 2023 were $608,947 and $1,253,886, respectively. Cost of sales for the six months ended June 30, 2024 and 2023 were $1,111,218 and $1,658,722, respectively. These costs consisted of the costs related to the sale of the vehicles sold as described above. The decrease in cost of sales was due to the decrease in sales during the periods in 2024 as compared to 2023.

Gross margin percentage were 25% and 41% three months ended June 30, 2024 and 2023, respectively. Gross margin percentage were 32% and 38% six months ended June 30, 2024 and 2023, respectively. The decrease in gross margin percentage was primarily due to less favorable product mix.

General and Administrative ("G&A") Expenses

G&A expenses were $1,466,748 and $2,041,146 for the three months ended June 30, 2024 and 2023, respectively. G&A expenses decreased by $574,398 primarily due to a decrease of $70,119 in stock compensation expense as a result of lower fair valuation of equity awards, lower payroll costs of $37,486, lower legal fees of $69,117as a result of lower litigation activities, lower marketing costs of $86,910, lower travel costs of $92,060, lower contract labor costs of $110,053, lower dues and subscription costs of $119,996 and lower investor relations costs of $194,420, most of which were due to our cost savings initiative implemented to conserve spending, partially offset by higher insurance costs of $108,098 due to increased premiums and coverages and an increase in other expenses of $27,546 to support our operations.

G&A expenses were $4,660,999 and $4,206,678 for the six months ended June 30, 2024 and 2023, respectively. G&A expenses increased by $454,321 primarily due to an increase of $1,661,118 in stock compensation expense due to equity awarded during the first quarter of 2024 that vested immediately, partially offset by, among other things, lower litigation costs of $198,975, lower marketing costs of $251,687, lower travel costs of $261,687, lower contract labor costs of $269,944, lower payroll costs of $56,054 and lower overall other expenses of $168,450, most of which were due to our cost savings initiative implemented to conserve spending.

Consulting Expenses

Consulting expenses were $0 and $46,433 for the three months ended June 30, 2024 and 2023, respectively. Consulting expenses were $0 and $221,242 for the six months ended June 30, 2024 and 2023, respectively. The decrease in consulting expenses was due to a decrease in search costs for key employees.

Research and Development ("R&D") Expenses

R&D expenses were $61,616 and $57,924 for the three months ended June 30, 2024 and 2023, respectively, as the level of activity remained significantly unchanged. R&D expenses were $131,880 and $128,812 for the six months ended June 30, 2024 and 2023, respectively as the level of activity remained significantly unchanged.

Unrealized loss on financial instruments at fair value

We recorded a non-cash unrealized gain of $570,519 and an unrealized loss of $999,408 for the three and six months ended June 30, 2024, respectively, on our financial instruments that we elected to measure at fair value.

Cash Flows

The following table summarizes our cash flows from operating, investing, and financing activities for the six months ended June 30, 2024 and 2023:

Operating Activities

Net cash used in operating activities for the six months ended June 30, 2024 was $1,700,563, primarily due to a net loss of $5,287,455, partially offset by changes in operating assets and liabilities, net of $658,185 and non-cash operating charges of $2,928,519. The changes in operating assets and liabilities, net was due to a decrease in inventory deposits of $443,074, a decrease in prepaid expenses of $187,474, a decrease in inventory of $127,372, a decrease in other assets of $164,467, an increase in accounts payable of $195,786 and an increase in accrued liabilities of $438,089, partially offset by an increase in accounts receivable of $733,998 and a decrease in other liabilities of $164,079.

Net cash used in operating activities for the six months ended June 30, 2023 was $3,073,334, primarily due to a net loss of $3,521,937, partially offset by changes in operating assets and liabilities, net of $233,300 and non-cash operating charges of $260,519. The changes in operating assets and liabilities, net was due to a decrease in inventory deposits of $1,771,454, a decrease in prepaid expenses of $356,742 and an increase in accounts payable of $317,469, partially offset by an increase in inventory of $1,266,924, an increase in accounts receivable of $660,028 and a decrease in accrued liabilities of $264,486.

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 and government incentives 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 used in investing activities during the six months ended June 30, 2024 was $135,288, primarily from the purchase of property and equipment that is used in our current operations.

Net cash provided by investing activities during the six months ended June 30, 2023 was $1,293,268, primarily due to the sale of our marketable securities of $1,329,599, partially offset by $36,331 of capital expenditures.

Financing Activities

Net cash provided by in financing activities during the six months ended June 30, 2024 was $1,816,196, primarily due to proceeds from the issuance of our common stock of $949,248, proceeds from the issuance of a convertible note of $901,000, and proceeds from issuance of debt for $232,067, partially offset by the repayment of debt of $266,119. See Note 4 - Debt to our unaudited consolidated financial statements included in this Quarterly Report for additional information regarding these financing activities.

Net cash used in financing activities during the six months ended June 30, 2023 was $212,119 as a result of our repayment of certain notes payable.

Liquidity and Capital Resources

As of June 30, 2024, we had cash and cash equivalents of $437,064 and working capital of approximately $7,706,057. We believe that our existing cash and cash equivalents 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.

In February 2022, we announced Osceola, Arkansas as the site of our state-of-the-art manufacturing facility and new corporate offices. The facility of approximately 580,000 square feet is currently our headquarters and is planned to become our primary manufacturing facility. We are 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 significant investment through the foreseeable future. We expect that investments and employee hiring requirements over the next 10 years will provide an opportunity for us to obtain significant local tax incentives, provided that the qualifying expenditures are made, and other related conditions are met. We are not currentlycontractually obligated to make these expenditures.

Line of Credit

Effective August 4, 2022, we secured a line of credit from Centennial Bank. Borrowings under the line of credit bear interest at 2.75% annually. There is no maturity date for the line, but Centennial Bank may at any time, in its sole discretion and without cause, demand us to 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 us in our Centennial Bank accounts. Borrowings under the line may not exceed cash, cash equivalents, and marketable securities balances up to $1,000,000. This line was closed during the third quarter of 2023 and there was no principal amount outstanding at the time of closing.

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 continue increasing those expenditures as we transfer assembly and corporate functions to the 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 period ended June 30, 2024, we have no contractual obligations.

Critical Accounting Policies and Significant Judgments and Estimates

Our consolidated financial statements are prepared in accordance with GAAP. The preparation of our 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 under GAAP 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.

Smaller Reporting Company Status

We are 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. We may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not smaller reporting companies, including reduced disclosure about our executive compensation arrangements.

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.

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.

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 June 30, 2024. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures were not effective as of such time due to the material weakness described below:

We have been unable to maintain appropriate segregation of duties. 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 to supplement our efforts and mitigate the negative effects of our limited accounting staff.

Changes in Internal Control over Financial Reporting

There was no change in the Company’s internal control over financial reporting during the most recent three-month period covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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 our Annual Report on Form 10-K for the year ended December 31, 2023.