AZIO AI HOLDINGS, INC. 10-K

Item 5. MARKET FOR REGISTRANT ’ S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES   Market Information   Our common stock trades on the NASDAQ market under the symbol “EVTV.” Over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.     Holders   As of September 19, 2023, we had approximately 160 record holders of our common stock. The actual number of stockholders is greater than this number of record holders and includes stockholders who are beneficial owners, but whose shares are held in street name by brokers and other nominees. The number of holders of record also does not include stockholders whose shares may be held in trust by other entities.   Dividend Policy   We have never declared or paid any dividends on our common stock and do not anticipate that we will pay any dividends to holders of our common stock in the foreseeable future. Instead, we currently plan to retain any earnings to finance the growth of our business. Any future determination relating to dividend policy will be made at the discretion of our board of directors and will depend on our financial condition, results of operations and capital requirements as well as other factors deemed relevant by our board of directors.   Recent Sales of Unregistered Securities   None.   Repurchases of Equity Securities   We did not purchase any of our equity securities during the period covered by this Annual Report.   Item 6. [Reserved]   42 Table of Contents     Item 7. MANAGEMENT ’ S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS   The following discussion should be read in conjunction with our financial statements and related notes included in Part II, Item 8 of this Annual Report. This discussion contains forward-looking statements that reflect our plans, estimates, beliefs and expectations that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors including, but not limited to, those discussed in Item 1 (Business) and Item 1A (Risk Factors) of Part I of this Annual 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.   As discussed in Item 8, Notes 2 and 3 to the consolidated financial statements of Envirotech Vehicles, Inc. contained in this Annual Report on Form 10-K, as a result of the closing of the Merger on March 15, 2021, the historical results discussed in this section of the Annual Report are those of Envirotech Drive Systems, Inc. (“EVTDS”) as of and for the years ended December 31, 2022 and 2021, including the balance sheet accounts of Envirotech Vehicles, Inc. (formerly ADOMANI, Inc.), at December 31, 2022 and 2021, and including the consolidated results of operations of Envirotech Vehicles, Inc. (formerly ADOMANI, Inc.) and EVTDS for the entire annual period ended December 31, 2022. The consolidated results of operations for the fiscal period ended December 31, 2021, include the results of operations of EVTDS for the entire annual period and include the consolidated results of operations of Envirotech Vehicles, Inc. (formerly ADOMANI, Inc.) and its subsidiaries for the post-merger period March 16, 2021 through December 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 years ended December 31, 2022 and 2021, respectively, we generated sales revenue of approximately $4.5 million and $2.0 million, respectively, and our net losses were $43.8 million and $7.7 million, respectively. The 2022 loss includes approximately $39.1 million of non-cash expenses, including a goodwill impairment charge of approximately $37.1 million.   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 affected 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 vehicles, 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; 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.   43 Table of Contents     • Zero-emission electric 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 consolidated financial statements included in this Annual 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 substantially related to our external 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 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, and the income tax benefit recorded in 2020 has been reversed in 2021 and effectively reserved as well.   44 Table of Contents   Results of Operations The following discussion compares operating data for the year ended December 31, 2022 to the data for the year ended December 31, 2021:   Sales       Year Ended December 31,                       2022     2021     $ Change     % Change   Sales   $ 4,504,621     $ 2,042,844     $ 2,461,777       121 %   Sales were approximately $4.50 million for the year ended December 31, 2022, compared to $2.04 million for the year ended December 31, 2021. Sales for the year ended December 31, 2022 consisted of [58] logistic cargo vans sold primarily to customers in New Jersey who utilized a voucher from the NJ ZIP program, [5] cab and chassis trucks sold to FAR distributors and other customers and three used buses. Sales for the year ended December 31, 2021 consisted of 21 vehicles, (cargo vans and trucks) sold to customers and FAR distributors, as well as maintenance and inspection services provided.    Cost of Goods Sold       Year Ended December 31,                       2022     2021     $ Change     % Change   Cost of goods sold   $ 2,772,673     $ 1,281,468     $ 1,491,205       116 %   Cost of sales related to the sales revenue described above were approximately $2.77 million for the year ended December 31, 2022, which resulted in gross profit of $1.73 million and a gross margin percentage of 38%, compared to $1.28 million for the year ended December 31, 2021, which resulted in gross profit of $0.76 million and a gross margin percentage of 37%.   Operating Expenses       Year Ended December 31,                       2022     2021     $ Change     % Change   General and administrative 1   $ 7,996,906     $ 8,238,531     $ (241,625 )     (3 )% Consulting     339,505       188,703       150,802       80 % Research and Development     149,912       58,139       91,773       158 % Goodwill impairment charge     37,093,047       —       37,093,047       N/A   Total operating expenses, net   $ 45,579,370     $ 8,485,373     $ 37,093,997       451 %   1 Includes stock-based compensation expense as follows:       Year Ended December 31,                       2022     2021     $ Change     % Change   Stock-based compensation expense   $ 1,614,845     $ 3,414,440     $ (1,799,595 )     (53 )%   General and Administrative Expenses   General and administrative expenses for the year ended December 31, 2022 were $7,996,906, compared to $8,238,531 for 2021, a decrease of $241,625, which was primarily related to a decrease in non-cash stock-based compensation expense of $1,799,595 and to the effect of $685,000 of lawsuit settlement expense in 2021, partially offset by increases in other general administrative expenses which increased in order to prepare for future expected growth.   Consulting   Consulting expenses were $339,505 for the year ended December 31, 2022, as compared to $188,703 for 2021, 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 payments to another firm that assists the Company with public affairs, media and public relations.   45 Table of Contents   Research and Development   Research and development expenses were $149,912 for the year ended December 31, 2022, compared to $58,139 for the year ended December 31, 2021. The increased expense in 2022 was due to the development of new product lines, which includes a school bus and Class 5 cab over chassis truck.   Goodwill Impairment Charge   Based on the annual impairment test, we recorded a non-cash goodwill impairment charge of $37,093,047 as of December 31, 2022.   Other Income (Expense)       Year Ended December 31,       2022     2021     $ Change     % Change   Interest income, net   $ 45,026     $ 4,412     $ 40,614       921 % Other (expense) income, net     (1,764 )     288,185       (289,949 )     (101 )% Total other income   $ 43,262     $ 292,597     $ (249,335 )     (85 )%   Interest income, net consists primarily of interest earned on short-term investments, partially offset by interest expense on debt. Interest income, net increased to $45,026 for the year ended December 31, 2022 compared to $4,412 for the year ended December 31, 2021, primarily due to higher interest rates earned on short-term investments during 2022.   Other income of $288,185 for the year ended December 31, 2021 primarily consists of a gain of $290,520 on forgiveness of the Company’s loan under the Paycheck Protection Program established pursuant to the CARES Act.   Income Tax Expense   Income tax for the year ended December 31, 2021 consists primarily of $218,300 of EVTDS deferred income tax benefits reversed following the Merger.   Liquidity and Capital Resources   As of December 31, 2022, we had cash and cash equivalents of $2,765,068 and short-term investments of $2,336,402, a combined total of $5,101,470, and working capital of $16,867,201. We believe that our existing cash, cash equivalents and short-term investments will be sufficient to fund our present operations during the next 12 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. We 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 us to obtain local tax incentives granted to the Company of up to $27 million, provided that the qualifying expenditures are made. We are not not currently contractually obligated to make the expenditures.   Cash Flows   The following table summarizes our cash flows from operating, investing, and financing activities for the years ended December 31, 2022 and 2021:       Year Ended December 31,       2022     2021   Cash flows used in operating activities   $ (7,432,087 )   $ (12,936,755 ) Cash flows provided by (used in) investing activities     5,507,719       (4,677,839 ) Cash flows (used in ) provided by financing activities     (156,690 )     20,590,987   Net change in cash, restricted cash and cash equivalents   $ (2,081,058 )   $ 2,976,393       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 goodwill impairment charges and stock-based compensation, and changes in the asset and liability accounts.   Net cash used in operating activities for the year ended December 31, 2022 was $7,432,087 compared to $12,936,755 for the year ended December 31, 2021, a decrease of cash used of $5,504,668. The decrease in net cash used in operating activities was due primarily to lower cash used by changes in our operating assets and liabilities, primarily related to accounts receivable, inventory and inventory deposits. The net cash used by changes in our operating assets and liabilities was $2,668,276 for the year ended December 31, 2022, due primarily to increases of $890,880 in accounts receivable and $1,820,785 in inventory. This compares to net cash used by changes in our operating assets and liabilities of $8,787,406 for 2021, due primarily to increases of $4,503,079 in inventory deposits, $3,198,877 in inventory and $1,415,657 in accounts receivable. The remainder of the decrease in net cash used in operating activities compared to 2021 was due to a lower net loss in 2022 after accounting for non-cash expenses. Although we reported a net loss of $43,804,160 for the year ended December 31, 2022, the loss included $39,040,349 of non-cash expenses, including a goodwill impairment charge of $37,093,047 and stock-based compensation of $1,614,845. Net loss for 2021 was $7,652,100, which included net non-cash expenses of $3,502,751, including stock-based compensation of $3,414,440.   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.       46 Table of Contents   Investing Activities   Net cash provided by investing activities during the year ended December 31, 2022 was $5,507,719, as compared to cash used in investing activities of $4,677,839 during the year ended December 31, 2021. Net cash provided in 2022 consisted of proceeds from sales and maturities of marketable securities of $9,619,242, partially offset by purchases of marketable securities of $3,942,940 and capital expenditures of $168,583. Net cash used in 2021 consisted of purchases of marketable securities of $16,233,213 and capital expenditures of $27,958, partially offset by proceeds from sales of and maturities of marketable securities of $8,210,000 and cash acquired in the merger of $3,373,332.   Financing Activities   Net cash used in financing activities during the year ended December 31, 2022 was $156,690 and net cash provided by financing activities in 2021 was $20,590,987. Net cash used in financing for 2022 primarily consisted of principal repayments of debt of $276,690, partially offset by proceeds from the issuance of common stock for options exercised of $120,000. Net cash provided by financing activities in 2021 consisted primarily of the pre-merger $4,621,200 proceeds from the issuance of common stock raised by EVTDS in 2021 in anticipation of the Merger; a second common stock offering post-merger which raised $16,274,991, and $211,219 raised in 2021 from the issuance of stock for stock options that were exercised, partially offset by offering costs of $188,015 and debt repayments of $328,408.   Line of Credit   Effective August 4, 2022, the Company 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 the Company 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 the Company in its Centennial Bank accounts. Borrowings under the line may not exceed cash, cash equivalents, and marketable securities balances up to $1,000,000. There was no principal amount outstanding on December 31, 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 consolidated financial statements in Item 8 of this Annual Report on Form 10-K for the year ended December 31, 2022, the Company has no contractual obligations.   Off-Balance Sheet Arrangements   We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of the SEC.   47 Table of Contents   Indemnification Agreements   As we have generated sales, we have provided customers with indemnification of varying scope against claims of intellectual property infringement by third parties arising from the use of our products. We do not estimate the costs related to these indemnification provisions to be significant and are unable to determine the maximum potential impact of these indemnification provisions on our future results of operations. In addition, we have directors and officers liability coverage to further mitigate our indemnification exposure. No demands have been made upon us to provide indemnification and there are no claims that we are aware of that could have a material effect on our consolidated balance sheet, consolidated statement of operations, or consolidated cash flows.   Critical Accounting Policies 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 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. No critical accounting policies existed at December 31, 2022.   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.   Recent Accounting Pronouncements   Management has considered all recent accounting pronouncements issued, but not effective, and does not believe that they will have a significant impact on the Company’s financial statements.