AZIO AI HOLDINGS, INC. 10-K

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm Barton CPA PLLC (PCAOB Firm ID 6968 ) 44 Consolidated Balance Sheets as of December 31, 2023 and 2022 46 Consolidated Statements of Operations for the years ended December 31, 2023 and 2022 47 Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2023 and 2022 48 Consolidated Statements of Cash Flows for the years ended December 31, 2023 and 2022 49 Notes to Consolidated Financial Statements 50 43 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Certified Public Accountants and Advisors A PCAOB Registered Firm 817-721-0341 bartoncpafirm.com Cypress, Texas Report of Independent Registered Public Accounting Firm To the Board of Directors and Shareholders Envirotech Vehicles, Inc. and its Subsidiaries Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Envirotech Vehicles, Inc. and its Subsidiaries as of December 31, 2023 and 2022, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of Envirotech Vehicles, Inc. and its Subsidiaries as of December 31, 2023 and 2022, and the results of its operations and its cash flows for the year ended December 31, 2023 and 2022, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These consolidated financial statements are the responsibility of the entity’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to Envirotech Vehicles, Inc. and its Subsidiaries in accordance with the U.S. federal securities laws and the applicable rules and regulations of the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Envirotech Vehicles, Inc. and its Subsidiaries is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters Critical audit matters are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. 44 Table of Contents Valuation of Goodwill Description of the Matter: As of December 31, 2023, the Company’s goodwill was $9,583,836. As disclosed in Note 2 to the consolidated financial statements, goodwill is tested for impairment at least annually at the reporting unit level. For a reporting unit in which the Company concludes, based on the qualitative assessment, that it is more likely than not that the fair value of the reporting unit is less than its carrying amount (or if the Company elects to skip the optional qualitative assessment), the Company is required to perform a quantitative impairment test, which includes measuring the fair value of the reporting unit and comparing it to the reporting unit’s carrying amount. In the year ended December 31, 2023, the Company recorded a goodwill impairment charge of $5,098,784 as disclosed in Note 2 to the consolidated financial statements. Auditing management’s quantitative impairment test for goodwill was complex and judgmental due to the significant estimation required to determine the fair value of a reporting unit. In particular, the fair value estimate was sensitive to significant assumptions, such as changes in the weighted average costs of capital, revenue growth rates, operating margins, working capital and terminal value, which are affected by expectations about future market or economic conditions. How We Addressed the Matter in Our Audit: We performed substantive procedures which included, among others, (i) testing management’s process for estimating the fair value of the reporting units; (ii) testing the completeness, accuracy and relevance of the data used in estimating the fair value of the reporting units; and (iii) evaluating the reasonableness of the significant assumptions used by management. We have served as Envirotech Vehicles, Inc. and its Subsidiaries’ auditor since 2023. Cypress, Texas March 28, 2024 45 Table of Contents ENVIROTECH VEHICLES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, December 31, 2023 2022 ASSETS Current assets: Cash and cash equivalents $ 456,719 $ 2,765,068 Restricted cash — 60,399 Marketable securities — 2,336,402 Accounts receivable, net of allowance of $ 20,929 and $ 271,218 , respectively, 692,102 2,073,691 Inventory, net 6,830,593 5,671,326 Inventory deposits 3,300,388 4,829,933 Prepaid expenses 614,238 445,963 Other current assets 162,119 156,457 Total current assets 12,056,159 18,339,239 Property and equipment, net 320,687 368,461 Right-of-use asset 538,932 — Goodwill 9,583,836 14,682,620 Other non-current assets 153,555 93,369 Total assets $ 22,653,169 $ 33,483,689 LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) Current liabilities: Accounts payable $ 760,802 $ 603,744 Accrued liabilities 452,236 652,528 Operating lease liability - short-term 291,263 — Notes payable - current 269,245 215,766 Total current liabilities 1,773,546 1,472,038 Long-term liabilities Operating lease liability - long-term 235,625 — Notes payable - long-term 10,420 16,671 Total liabilities 2,019,591 1,488,709 Stockholders’ equity: Preferred stock, 5,000,000 authorized, $ 0.00001 par value per share, none issued and outstanding as of December 31, 2023 and 2022 — — Common stock, 350,000,000 authorized, $ 0.00001 par value per share, 15,171,748 and 15,021,088 issued and outstanding as of December 31, 2023 and 2022, respectively 152 150 Additional paid-in capital 85,245,925 83,923,350 Accumulated deficit ( 64,612,499 ) ( 51,928,520 ) Total stockholders’ equity 20,633,578 31,994,980 Total liabilities and stockholders’ equity $ 22,653,169 $ 33,483,689 See accompanying notes to consolidated financial statements. 46 Table of Contents ENVIROTECH VEHICLES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Year Ended December 31, 2023 2022 Sales $ 2,862,853 $ 4,504,621 Cost of sales 1,857,273 2,772,673 Gross profit 1,005,580 1,731,948 Operating expenses: General and administrative 8,171,344 7,996,906 Consulting 213,930 339,505 Research and development 236,181 149,912 Goodwill impairment charge 5,098,784 37,093,047 Total operating expenses, net 13,720,239 45,579,370 Loss from operations ( 12,714,659 ) ( 43,847,422 ) Other income (expense): Interest income, net 34,835 45,026 Other (expense) income, net ( 4,155 ) ( 1,764 ) Total other income 30,680 43,262 Loss before income taxes ( 12,683,979 ) ( 43,804,160 ) Income tax expense — — Net loss $ ( 12,683,979 ) $ ( 43,804,160 ) Net loss per share to common stockholders: Basic and diluted $ ( 0.84 ) $ ( 2.92 ) Weighted shares used in the computation of net loss per share: Basic and diluted 15,061,945 14,991,837 See accompanying notes to consolidated financial statements. 47 Table of Contents ENVIROTECH VEHICLES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS ’ EQUITY Additional Common Stock Paid-In Accumulated Stockholders’ Shares Amount Capital Deficit Equity Balance, December 31, 2021 14,912,189 $ 149 $ 81,866,075 $ ( 8,124,360 ) $ 73,741,864 Common stock issued for cash 50,000 1 119,999 — 120,000 Common stock issued for litigation settlements accrued in 2021 58,899 — 322,431 — 322,431 Stock based compensation — — 1,614,845 — 1,614,845 Net loss — — — ( 43,804,160 ) ( 43,804,160 ) Balance, December 31, 2022 15,021,088 $ 150 $ 83,923,350 $ ( 51,928,520 ) $ 31,994,980 Common stock issued for services rendered by external parties 150,660 2 99,998 — 100,000 Unearned compensation issued to external party — — ( 100,000 ) — ( 100,000 ) Stock based compensation — — 1,322,577 — 1,322,577 Net loss — — — ( 12,683,979 ) ( 12,683,979 ) Balance, December 31, 2023 15,171,748 $ 152 $ 85,245,925 $ ( 64,612,499 ) $ 20,633,578 See accompanying notes to consolidated financial statements. 48 Table of Contents ENVIROTECH VEHICLES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31, 2023 2022 Cash flows from operating activities: Net loss $ ( 12,683,979 ) $ ( 43,804,160 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 128,801 97,242 Provision for bad debt 20,929 245,219 Stock based compensation expense 1,322,577 1,614,845 Goodwill impairment charge 5,098,784 37,093,047 Other 9,904 ( 10,004 ) Changes in assets and liabilities: Accounts receivable 1,360,660 ( 890,880 ) Inventory ( 1,159,267 ) ( 1,820,785 ) Inventory deposits 1,529,545 ( 326,854 ) Prepaid expenses 298,798 325,638 Other current assets ( 21,806 ) ( 156,457 ) Other non-current assets ( 72,230 ) 143,270 Accounts payable 111,838 365,284 Accrued liabilities ( 189,654 ) ( 305,065 ) Other non-current liabilities — ( 2,427 ) Net cash used in operating activities ( 4,245,100 ) ( 7,432,087 ) Cash flows from investing activities: Purchase of property and equipment, net ( 35,810 ) ( 168,583 ) Purchases of marketable securities — ( 3,942,940 ) Proceeds from sales and maturities of marketable securities 2,342,643 9,619,242 Net cash provided by investing activities 2,306,833 5,507,719 Cash flows from financing activities: Proceeds from issuance of common stock — 120,000 Principal repayments on debt ( 430,481 ) ( 276,690 ) Net cash used in financing activities ( 430,481 ) ( 156,690 ) Net change in cash, restricted cash and cash equivalents ( 2,368,748 ) ( 2,081,058 ) Cash, restricted cash and cash equivalents at the beginning of the period 2,825,467 4,906,525 Cash, restricted cash and cash equivalents at the end of the period $ 456,719 $ 2,825,467 Supplemental cash flow disclosures: Cash paid for interest expense $ 14,997 $ 16,338 Non-cash investing and financing activities: Common stock issued in litigation settlements accrued in previous years $ — $ 322,431 Common stock issued for services rendered $ 2 $ — Notes payable issued to finance prepaid insurance $ 467,074 $ 439,087 Notes payable issued to finance purchase of property and equipment $ — $ 25,007 See accompanying notes to consolidated financial statements. 49 Table of Contents ENVIROTECH VEHICLES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Organization and Operations Envirotech Vehicles, Inc. (“we,” “us,” “our” or the “Company”) is 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. The Company serves 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. The Company’s vehicles address the challenges of traditional fuel price cost instability and local, state and federal regulatory compliance. On June 28, 2022, we effected a 1 -for- 20 reverse stock split of our common stock with no change to authorized shares of common stock. All share, restricted stock unit (“RSU”), and per share or per RSU information through this Annual Report on Form 10 -K has been retroactively adjusted to reflect the stock split. The shares of common stock retain a par value of $ 0.00001 per share. Accordingly, an amount equal to the par value of the decreased shares resulting from the reverse stock split was reclassified from “Common stock” to “Additional paid-in capital.” On March 30 2023, the Company entered into an agreement with Berthaphil, Inc. ("Berthaphil") to sublease approximately 3,600 square yards of a warehouse building based in the Clark Freeport Zone in the Philippines. The term of the lease is two years and two months with a turnover date of July 1, 2023 ( "turnover date") and a rental commencement date of September 1, 2023. The Company intends to use the leased space as a production facility as it seeks to expand its business presence both in the region and the United States. 2. Summary of Significant Accounting Policies Basis of Presentation —The accounting and reporting policies of the Company conform with generally accepted accounting principles in the United States (“GAAP”). Principles of Consolidation —The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Use of Estimates —The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Fair Value of Financial Instruments —The carrying values of the Company’s financial instruments, including cash and cash equivalents, restricted cash, accounts receivable and accounts payable approximate their fair value due to the short-term nature of these financial instruments. Accounting Standards Codification (“ASC”) 820, Fair Value Measurement ("ASC 820" ) defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. It also establishes a three -tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows: Level 1: Observable inputs such as quoted prices in active markets; Level 2: Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and Level 3: Unobservable inputs that are supported by little or no market data and that require the reporting entity to develop its own assumptions. 50 Table of Contents The Company does not have any assets or liabilities that are required to be measured and recorded at fair value on a recurring basis. Revenue Recognition —The Company recognizes revenue from the sales of zero -emission electric vehicles and vehicle maintenance and inspection services. The Company recognizes revenue in accordance with ASC 606, Revenue from Contracts with Customers ("ASC 606" ), which requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. For the year ended December 31, 2023 , eight customers accounted for approximately 75 percent of the annual revenue recorded. At December 31, 2022 , three customers accounted for approximately 43 percent of the annual revenue recorded. The Company had accounts receivable, net of $ 692,102 and $ 2,073,691 on December 31, 2023 and December 31, 2022, respectively. In applying ASC 606, the Company is required to: ( 1 ) identify any contracts with customers; ( 2 ) determine if multiple performance obligations exist; ( 3 ) determine the transaction price; ( 4 ) allocate the transaction price to the respective obligation; and ( 5 ) recognize the revenue as the obligation is satisfied. Product revenue consists primarily of the sale of electric trucks and cargo vans. These sales represent a single performance obligation with revenue recognition occurring at the time title transfers. Transfer of title generally occurs when the customer has accepted the vehicle and signed the appropriate documentation acknowledging receipt. At this time, the title of the vehicle is transferred to the customer. The Company provides the option of financing (flooring) to Factory Authorized Representatives (“FARs”) for demo vehicles that are used in their selling process. Flooring agreements are made either expressly or implicitly and last no longer than one year with respect to specific vehicles, as payment for the vehicles is due in full before the first anniversary of the agreement, or upon sale by the FAR of the demo vehicle. The interest rate associated with the flooring agreement is agreed upon at the time of executing the FAR agreement. The Company has elected the practical expedient allowed by ASC Topic 606 where consideration does not need to be adjusted for financing components of the agreement. Other revenue for the years ended December 31, 2023 and December 31, 2022 were $ 29,605 and $ 36,320 respectively, and primarily included safety inspection and document fees for compliance with United States Department of Transportation guidelines. These sales represent a single performance obligation with revenue recognition occurring at the time services are invoiced. The Company has therefore not provided any additional disaggregation information, as all other revenue relates to the sale of vehicles as discussed above. Cash and Cash Equivalents —The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. The recorded value of our restricted cash and cash equivalents approximates their fair value. Restricted Cash —The Company classifies certain bank balances as restricted cash as these balances are required to support certain minor activities. See Concentration of Credit Risk below in this Note. The Company had $ 0 and $ 60,399 of restricted cash at December 31, 2023 and December 31, 2022 , respectively. Short-term Investments —The Company invests in short-term, highly liquid, marketable securities, such as U.S. Treasury notes, U.S. Treasury bonds, and other government-backed securities. The Company also invests in bank certificates of deposit. The Company classifies these short-term investments as held-to-maturity, as the intent is not to liquidate them prior to the respective stated maturity date. These securities had original maturity dates ranging from 158 days to 200 days, and at December 31, 2023 , the Company had $ 0 investments in such securities. At December 31, 2022 , the aggregate amount of the Company’s investments in marketable securities was $2,336,402. These securities had original maturity dates ranging from 143 days to 364 days, and at December 31, 2022 , the remaining maturity dates on these securities ranged from 1 to 90 days. 51 Table of Contents Accounts Receivable and Allowance for Doubtful Accounts —The Company establishes an allowance for doubtful accounts through a review of several factors including historical collection experience, current aging status of the customer accounts, and financial condition of its customers. The Company does not generally require collateral for its accounts receivable. A significant portion of the Company’s sales are made to customers who qualify for state-sponsored grant programs which can cover a significant portion, up to most of, a vehicle’s purchase price. Grant monies are paid directly to vehicle dealers like the Company after the customer and the dealer meet state requirements related to the transaction; reimbursements to the dealer may take two to nine months from the date of request before being received. The Company estimates its allowance for doubtful accounts using an aging schedule, including a review of customers who may have a likelihood of default. A percentage is applied to the respective portfolio of customers which are grouped by how long their balance has been outstanding. This percentage represents an estimate of credit losses for the remaining estimated life of the accounts receivable balances and is estimated using historical experience, current conditions and reasonable and supportable forecasts that generally applies to accounts receivables, which are measured at amortized costs. The Company had trade accounts receivable of $ 713,031 and an allowance for doubtful accounts of $ 20,929 at December 31, 2023 . The Company had trade accounts receivable of $ 2,344,909 and an allowance for doubtful accounts of $ 271,218 as of December 31, 2022 . The Company did have a concentration of customers: four customers’ balances account for approximately 90 percent of the outstanding accounts receivable for the year ended December 31, 2023 . If the Company is unable to collect from these customers, the Company's write-offs will significantly increase and the write-offs may have a material adverse impact on the Company's financial condition. However, the Company does not believe the receivables balance from these customers represents a significant risk based on past collection experience. At December 31, 2022 , three customers’ balances account for approximately 37 percent of the outstanding accounts receivable; for the year ended December 31, 2022 Inventory and Inventory Valuation Allowance —The Company records inventory at the lower of cost or net realizable value, uses a First In, First Out (“FIFO”) accounting valuation methodology and establishes an inventory valuation allowance for vehicles that it does not intend to sell in the future. The Company had finished goods inventory on hand of $ 6,843,022 as of December 31, 2023 and recorded an inventory valuation allowance of $ 12,429 related to three vehicles that the Company does not intend to support in the future, resulting in a net inventory balance of $ 6,830,593 at December 31, 2023 . The Company had finished goods inventory on hand of $ 5,683,755 as of December 31, 2022 and recorded an inventory valuation allowance of $ 12,429 resulting in a net inventory balance of $5,671,326 as of December 31, 2022 . Inventory Deposits —Certain of our vendors require the Company to pay upfront deposits before they will commence manufacturing our vehicles, and then require progress deposits through the production cycle and before the finished vehicles are shipped. These deposits are classified as inventory deposits in the Consolidated Balance Sheets. Upon completion of production, acceptance by the Company, and passage of title to the Company, deposits are reclassified to inventory. The Company had inventory deposits of $ 3,300,388 and $ 4,829,933 as of December 31, 2023 and December 31, 2022 , respectively. Deposits paid to one vendor accounted for 99 percent of the deposits outstanding at December 31, 2023 . Deposits paid to three vendors accounted for 70 percent of the deposits outstanding at December 31, 2022. Income Taxes— The Company uses the liability method, where deferred tax assets and liabilities are determined based on the expected future tax consequences of temporary differences between the carrying amounts of assets and liabilities for financial and income tax reporting purposes. Envirotech Drive Systems, Inc. ("EVT") previously recorded deferred tax benefits from net operating losses in current and prior periods. The Company, in light of the uncertainty of generating future taxable income against which those losses can be offset in order to realize such benefits, has determined that recording a valuation allowance to reduce the deferred income tax assets to the amount that is more likely than not to be realized is appropriate. In making such determinations, management considers all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations. A full valuation allowance is recorded at December 31, 2023 and December 31, 2022. Accounting for Uncertainty in Income Taxes —The Company evaluates its uncertain tax positions and will recognize a loss contingency when it is probable that a liability has been incurred as of the date of the financial statements and the amount of the loss can be reasonably estimated. The amount recognized is subject to estimate and management judgment with respect to the likely outcome of each uncertain tax position. The amount that is ultimately sustained for an individual uncertain tax position or for all uncertain tax positions in the aggregate could differ from the amount recognized. At December 31, 2023 and 2022 , respectively, management did not identify any uncertain tax positions. Net Loss Per Share —Basic net loss per share is calculated by dividing the Company’s net loss applicable to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted net loss per share is calculated by dividing the Company’s net loss applicable to common stockholders by the diluted weighted average number of shares of common stock outstanding during the period. The diluted weighted average number of shares of common stock outstanding is the basic weighted number of shares of common stock adjusted for any potentially dilutive debt or equity securities. As of December 31, 2023 , 1,207,888 shares of the Company’s common stock were subject to issuance upon the exercise of stock options then outstanding and 1,389,584 shares of the Company’s common stock were subject to issuance upon the exercise of warrants then outstanding. As of December 31, 2022 , 608,266 shares of the Company’s common stock were subject to issuance upon the exercise of stock options then outstanding and 1,4202,417 shares of the Company’s common stock were subject to issuance upon the exercise of warrants then outstanding. Stock options and warrants were not included in the diluted weighted average number of shares outstanding for the years ended December 31, 2023 and 2022 , as the effect would be anti-dilutive. 52 Table of Contents Concentration of Credit Risk —The Company has credit risks related to cash and cash equivalents on deposit with a federally insured bank, as at times it exceeds the $250,000 maximum amount insured by the Federal Deposit Insurance Corporation (“FDIC”). Between FDIC and the Securities Investor Protection Corporation (“SIPC”) coverage, funds up to $ 750,000 , which may include cash up to $ 500,000 , are insured. The Company’s bank requires compensating balances, which are reported as Restricted Cash on the Company's Consolidated Balance Sheets as disclosed above, for a subsidiary’s potential lease exposure and for the Company’s credit card limit, resulting in restricted cash of $ 0 and approximately $ 60,399 at December 31, 2023 and 2022 , respectively. Impairment of Long-Lived Assets —Long-lived assets, including property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company evaluates these assets to determine potential impairment by comparing the carrying amount to the undiscounted estimated future cash flows of the related assets. If the estimated undiscounted cash flows are less than the carrying value of the assets, the assets are written down to their fair value. There was no impairment of long-lived assets, or property and equipment, as of December 31, 2023 and December 31, 2022 , respectively. Goodwill —Goodwill represents the excess of acquisition cost over the fair value of the net tangible and intangible assets acquired. Goodwill is not amortized and is subject to annual impairment testing on or between annual tests if an event or change in circumstance occurs that would more likely than not reduce the fair value of a reporting unit below its carrying value. In testing for goodwill impairment, the Company has the option to first assess qualitative factors to determine whether the existence of events or circumstances lead to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events and circumstances, the Company concludes that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, it can conclude the assessment. If the Company concludes otherwise, the Company is required to perform a quantitative analysis to determine the amount of impairment. A quantitative analysis is performed at the r eporting unit level by comparing the estimated fair value of a reporting unit with its respective carrying value to determine the amount of impairment, if any. The Company has determined that it has one reporting unit. In 2023, the Company conducted two impairment test: ( 1 ) due to a triggering event that occurred during the quarter of 2023 and ( 2 ) the annual impairment test. Based on the impairment tests, which predominantly utilized the Company's quoted market price and the number of outstanding shares at the end of the periods as inputs, the Company recorded a non-cash goodwill impairment charge of $ 5,098,784 and $ 37,093,047 as of December 31, 2023 and December 31, 2022, respectively. See Note 3 - Goodwill. Research and Development ("R&D") —Costs incurred in connection with the development of new products and manufacturing methods are charged to operating expenses as incurred. R&D expenses were $ 236,181 and $ 149,912 for the years ended December 31, 2023 and December 31, 2022 , respectively. Stock-Based Compensation —The Company accounts for employee stock-based compensation in accordance with the guidance of FASB ASC 718, Compensation-Stock Compensation ("ASC 718" ), which requires all share-based payments to employees, including grants of employee stock options and restricted shares and stock options to external consultants, to be recognized in the financial statements based on their grant date fair values using the Black-Scholes option pricing model for stock options and the closing market price on the date of the award for restricted shares and are recognized as compensation expense ratably over the requisite service period, which is generally the awards' vesting period. The Company recorded non-cash stock-based compensation expense of $ 1,322,577 and $ 1,614,845 for the years ended December 31, 2023 and December 31, 2022, respectively. Property and Equipment —Property and equipment are stated at cost, less accumulated depreciation and amortization. The Company provides for depreciation using the straight-line method over the estimated useful lives of the assets, which range from three to five years, except leasehold improvements, which are being amortized over the shorter of its useful life or the lease term. Major repairs and replacements, which extend the useful lives of equipment, are capitalized and depreciated over the estimated useful lives of the property. All other maintenance and repairs are expensed as incurred. Leases —The Company accounts for leases in accordance with ASC 842, Leases (“ASC 842” ). At the inception or modification of a contract, the Company determines whether a lease exists and classifies its leases as an operating or finance lease at commencement. Right-of-use ("ROU") assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent their obligation to make lease payments arising from the lease. See Note 13 - Leases. As most of the Company’s leases do not provide an implicit interest rate, the lease liability is calculated at lease commencement as the present value of unpaid lease payments using the Company’s estimated incremental borrowing rate. The incremental borrowing rate represents the rate of interest that the Company would have to pay to borrow an amount equal to the lease payments on a collateralized basis over a similar term and is determined using a portfolio approach based on information available at the commencement date of the lease. The lease asset also reflects any prepaid rent, initial direct costs incurred and lease incentives received. The Company’s lease terms may include optional extension periods when it is reasonably certain that those options will be exercised. Leases with an initial expected term of 12 months or less are not recorded in the Balance Sheet and the related lease expense is recognized on a straight-line basis over the lease term. For certain classes of underlying assets, the Company has elected to not separate fixed lease components from the fixed non-lease components. Recent Accounting Pronouncements—Currently Adopted On January 1, 2023, the Company adopted Accounting Standards Update (“ASU”) 2016 - 13 Financial Instruments – Credit Losses (Topic 326 ): Measurement of Credit Losses on Financial Instruments (“ASC 326” ). This standard replaced the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. CECL requires an estimate of credit losses for the remaining estimated life of the financial asset using historical experience, current conditions, and reasonable and supportable forecasts and generally applies to financial assets measured at amortized cost, such as accounts receivable. The adoption of ASU 2016 - 13 did not have a material impact on the Company’s consolidated financial statements. 53 Table of Contents 3. Goodwill The Company conducted two impairment tests in 2023: ( 1 ) during the first quarter when a triggering event occurred and ( 2 ) at year-end during its annual impairment test. in accordance with ASC 350 - 20, Goodwill . The Company conducted its annual impairment test in 2022. As a result of these tests, the Company recorded goodwill impairment charges of $ 5,098,784 and $ 37,093,047 for the years ended December 31, 2023 and December 31, 2022, respectively. The following table presents a reconciliation of the carrying amount of goodwill for the year ended December 31, 2023 : Balance at January 1, 2022 $ 51,775,667 Impairment charge ( 37,093,047 ) Balance at December 31, 2022 $ 14,682,620 Goodwill impairment charge ( 5,098,784 ) Balance at December 31, 2023 $ 9,583,836 4. Property and equipment, net Components of property and equipment, net consist of the following as of December 31, 2023 and 2022 : December 31, 2023 December 31, 2022 Furniture and fixtures $ 56,646 $ 56,646 Leasehold improvements 136,847 122,711 Machinery & equipment 172,527 165,753 Vehicles 297,940 252,724 Test/Demo vehicles 30,685 15,784 Total property and equipment 694,645 613,618 Less accumulated depreciation ( 373,958 ) ( 245,157 ) Net property and equipment $ 320,687 $ 368,461 Depreciation expense was $ 128,801 and $ 97,242 for the years ended December 31, 2023 and 2022 , respectively. 5. Income Taxes The cumulative estimated net operating loss (“NOL”) carry-forward is $ 44,188,133 and $37,312,984 at December 31, 2023 and 2022 , respectively. $ 29,810,794 of this carry-forward may be carried forward indefinitely while $ 14,377,339 is subject to expiration over a 20 -year period. Due to the enactment of the Tax Cuts and Jobs Act of 2017, the corporate tax rate for those tax years beginning with 2018 has been reduced to 21%. Therefore, the cumulative tax effect of the NOL carryforward at the expected rate of 21% comprising the Company’s net deferred tax amount is as follows: December 31, 2023 2022 Tax effected net operating loss $ 1,361,609 $ 1,169,392 Deferred tax asset attributable to: Net operating loss carryover 7,917,898 6,666,335 Research and development tax credit carryforward 274,891 274,891 Sub-total 9,554,398 8,110,618 Valuation allowance ( 9,554,398 ) ( 8,110,618 ) Net deferred tax asset $ — $ — Cumulative NOL $ 44,188,133 $ 37,312,984 54 Table of Contents Due to the change in ownership provisions of the Tax Reform Act of 1986, net operating loss carryover for federal income tax reporting purposes are subject to annual limitations. The net operating loss carry-forward includes the years 2012 through 2022 for the Envirotech Vehicles, Inc losses, and includes the years 2014 through 2020 for EVT, as the 2021 EVT loss is included in the consolidated Envirotech Vehicles, Inc. loss. Because a change in ownership occurred as a result of the Company’s acquisition of EVT pursuant to a merger of a wholly owned subsidiary of the Company with and into EVT, with EVT surviving the Merger as a wholly-owned subsidiary of the Company, net operating loss carryover will be limited as to use in future years. Federal tax returns for tax years since 2020 are still open for examination by the Internal Revenue Service. 6. Notes Payable On June 15, 2021, the Company entered into an equipment financing agreement with Navitas Credit Corp. in connection with the purchase of certain inventory management software. The $ 63,576 loan is payable over twenty-four months, beginning in July 2021, with monthly payments of $ 2,649 . The balance of this note is $ 0 and $ 13,245 on December 31, 2023 and December 31, 2022, respectively. On August 10, 2022, the Company entered into an equipment financing agreement with Wells Fargo in connection with the purchase of facility grounds equipment. The $ 25,007 loan is payable over 48 months, beginning in August 2022, with required monthly payments of $ 521 . The balance of this note is $ 16,671 and $ 22,923 on December 31, 2023 and December 31, 2022, respectively. On December 31, 2023, $ 6,252 is classified as Notes Payable - current and $ 10,420 is classified as Notes Payable - long term on the Company's Consolidated Balance Sheets. On December 31, 2022, $ 6,252 is classified as Notes Payable - current and $ 16,671 is classified as Notes Payable - long term on the Company's Consolidated Balance Sheets. Effective August 4, 2022, EVT secured a line of credit from Centennial Bank. Borrowings under the line of credit bearing interest at 3.25 % 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 cash, cash equivalents, and marketable securities balances up to $ 1,000,000 . This line of credit was closed during the third quarter of 2023 and there was no amount outstanding at the time of closing. Effective June 15, 2022, the Company entered into a premium financing agreement with First Insurance Funding to finance certain insurance coverage. The $ 225,000 loan is payable over nine months, beginning in July 2022, and bears interest at 5.8 % with monthly payments of $ 25,608 . The balance of this note is $ 0 on December 31, 2023. The balance of this note is $ 76,087 and is classified as Notes Payable - Current on the Company's Consolidated Balance Sheets on December 31, 2022. Effective August 20, 2022, the Company entered into a second premium financing agreement with First Insurance Funding to finance other insurance coverages. The $ 214,088 loan is payable over nine months, beginning in September 2022, and bears interest at 6.3 % with monthly payments of $ 24,416 . The balance of this note is $ 0 on December 31, 2023. The balance of this note is $ 120,182 and is classified as Notes Payable - Current on the Company's Consolidated Balance Sheets on December 31, 2022. Effective August 20, 2023, the Company entered into a third premium financing agreement with First Insurance Funding to finance other insurance coverages. The $ 467,074 loan is payable over nine months, beginning in September 2023, and bears interest at 8.2 % with monthly payments of $ 53,675 . The balance of this note is $ 262,993 on December 31, 2023 and is classified as Notes-Payable - current on the Company's Consolidated Balance Sheets. The following table depicts the future annual minimum principal payments as of December 31, 2023: Amount 2024 $ 269,245 2025 6,252 2026 4,167 Total payments $ 279,664 7. Common Stock The Company has 5,000,000 authorized preferred stock with $ 0.00001 par value per share on December 31, 2023 and December 31, 2022. There was no outstanding preferred stock on December 31, 2023 and December 31, 2022. The Company has 350,000,000 authorized common stock of which 15,171,748 and 15,021,088 were outstanding on December 31, 2023 and December 31, 2022, respectively. The par value of the Company's common stock is $ 0.00001 . 150,660 shares of the Company's common stock were issued during 2023 to external parties in conjunction with certain services rendered during the period. 8. Stock Warrants The Company’s outstanding warrants as of December 31, 2023 are summarized as follows, and all were exercisable at that date: Number of Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Life (years) Outstanding warrants expiring January 28, 2025 431,250 $ 10.00 1.08 Outstanding warrants expiring May 7, 2026 958,334 $ 20.00 2.35 Outstanding warrants on December 31, 2023 1,389,584 $ 17.43 1.93 The warrants issued contain a call provision whereby the Company, after the 13 -month anniversary of the issuance date, and if the volume weighted average price of the common stock for such date exceeds four times the exercise price of the warrants for 20 consecutive trading days, may call the warrants that have not previously been exercised, and the warrant holders have ten trading days within which to exercise before the warrants may be cancelled. As of December 31, 2023 and 2022 , the outstanding warrants have no intrinsic value. 9. Stock Options and Restricted Shares Stock Options The following is a summary of stock option activity under the Company’s 2017 Equity Incentive Plan for the year ended December 31, 2023 : Number of Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Life (years) Outstanding at December 31, 2021 338,500 $ 8.40 6.98 Options Granted during 2022: Options Granted at $2.00 Exercise Price 250,000 $ 2.00 Options Granted at $2.40 Exercise Price 90,893 $ 2.40 Options Granted at $3.62 Exercise Price 2,762 $ 3.62 Options Granted at $9.00 Exercise Price 1,111 $ 9.00 Exercised ( 50,000 ) $ 2.40 Canceled/Forfeited ( 25,000 ) $ 9.00 Outstanding at December 31, 2022 608,266 Outstanding Options at $2.00 Exercise Price 250,000 $ 2.00 9.05 Outstanding Options at $2.40 Exercise Price 90,893 $ 2.40 9.05 Outstanding Options at $3.62 Exercise Price 2,762 $ 3.62 4.09 Outstanding Options at $9.00 Exercise Price 257,861 $ 9.00 7.96 Outstanding Options at $26.20 Exercise Price 6,750 $ 9.00 5.30 Outstanding at December 31, 2022 608,266 $ 5.30 8.52 Options Granted during 2023: Options Granted at $2.65 Exercise Price 15,000 $ 2.65 Options Granted at $2.10 Exercise Price 588,495 $ 2.10 Options expired at $9.00 Exercise Price ( 1,111 ) $ 9.00 Options expired at $3.62 Exercise Price ( 2,762 ) $ 3.62 Outstanding at December 31, 2023 1,207,888 Outstanding Options at $2.00 Exercise Price 250,000 $ 2.00 8.02 Outstanding Options at $2.40 Exercise Price 90,893 $ 2.40 9.05 Outstanding Options at $9.00 Exercise Price 256,750 $ 9.00 7.96 Outstanding Options at $26.20 Exercise Price 6,750 $ 26.20 5.30 Options Granted at $2.65 Exercise Price 15,000 $ 2.65 9.29 Options Granted at $2.10 Exercise Price 588,495 $ 2.10 9.53 Outstanding at December 31, 2022 1,207,888 $ 3.71 8.53 Exercisable at December 31, 2022 1,196,220 $ 3.72 8.52 55 Table of Contents On January 7, 2022, the Company’s Compensation Committee granted Phillip W. Oldridge, the Company’s Chief Executive Officer, options to purchase 150,000 shares of common stock at an exercise price of $ 2.00 per share and options to purchase 50,000 shares of common stock at an exercise price of $ 2.40 per share. The options vested immediately and expire on the tenth anniversary of grant. On January 7, 2022, the Company’s Compensation Committee granted Susan M. Emry, the Company’s Executive Vice President, options to purchase 100,000 shares of common stock at an exercise price of $ 2.00 per share and options to purchase 40,893 shares of common stock at an exercise price of $ 2.40 per share. The options vested immediately and expire on the tenth anniversary of grant. On January 31, 2022, the Company’s Compensation Committee granted Christian S. Rodich, the Company’s former Chief Financial Officer, options to purchase 2,762 shares of common stock at an exercise price of $ 3.62 per share and options to purchase 1,111 shares of common stock at an exercise price of $ 9.00 per share. The options vest ratably at 1/60th per month over five years and expire on the tenth anniversary of grant. These options were forfeited three months after Mr. Rodich resigned from his employment with the Company. On March 15, 2022, options to purchase 50,000 shares of common stock were exercised by the former President and CEO of the Company at a price of $ 2.40 per share, resulting in a payment to the Company of $ 120,000 . Also on March 15, 2022, options to purchase an aggregate of 25,000 shares of common stock with an exercise price of $ 9.00 per share were forfeited by the former executive, as they were not exercised prior to their expiration on March 15, 2022. On April 19, 2023 options to purchase 15,000 shares of common stock at an exercise price of $ 2.65 per share were granted to two employees. These options vest ratably over three years. On July 11, 2023, the Company’s Compensation Committee granted the Board of Directors options to purchase 588,495 shares of common stock at an exercise price of $ 2.10 per share. The options vested immediately and expire on the tenth anniversary of grant. The options granted during 2023 were valued using the Black-Scholes option pricing model, resulting in a weighted average fair market value of approximately $ 4.71 per option for the years ended December 31, 2023 . The weighted average assumptions used in the valuation of the options are summarized in the following table: 2023 Risk-free interest rate 3.98 % Expected volatility 92.1 % Expected option term (years) 9.8 Expected dividend yield 0 % As of December 31, 2023 , the outstanding options had $ 0 intrinsic value. The Company recorded total stock compensation expense of $ 1,095,199 for the year ended December 31, 2023. Restricted Shares During the first quarter of 2023, the Company awarded 85,000 restricted shares to a vendor that will vest over a six -month period in exchange for marketing services to be provided over the same period. As a result, the Company recorded stock compensation expense $ 204,850 during the year ended December 31, 2023. These restricted shares were issued as common stock in the third quarter of 2023. During the fourth quarter of 2023, the Company awarded 65,660 restricted shares to a vendor in exchange for marketing services to be provided over a six -month period. As a result, the Company recorded stock compensation expense $ 22,528 during the year ended December 31, 2023., 10. Related Party Transactions The Company has entered into lease agreements with SRI Professional Services, Incorporated (“SRI”), pursuant to which the Company leases equipment used in connection with the operation of its business (the “SRI Equipment Leases”). Phillip W. Oldridge, the Company’s Chief Executive Officer and Chairman of the Board, and a member of its board of directors, serves as an executive officer and a member of the board of directors of SRI. The SRI Equipment Leases provide for the leasing of two vehicles that commenced on January 1, 2020 and the combined rent under such leases is $ 3,880 per month, and a separate SRI Equipment Lease provides for a trailer lease that commenced on December 1, 2019, under which the rent is $ 3,891 per month. The total monthly payment obligation of the Company under the SRI Equipment Leases is $ 7,771 . As a result of these agreements, the Company recorded rent expense of $ 93,247 for the year ended December 31, 2023. The Company has entered into a cancelable month-to-month lease with SRI (the “SRI Office Lease”), pursuant to which EVTDS has leased office and warehouse space in the Porterville, California area for a term that commenced on January 1, 2020. The monthly rent under the SRI Office Lease is $ 2,730 . The Company recorded rent expense of $ 13,650 for the year ended December 31, 2023 in connection with this agreement. The Company has entered into a commercial lease agreement (the “ABCI Office Lease”) with Alpha Bravo Charlie, Inc. (“ABCI”) that commenced on April 1, 2020, for the lease of office space in Porterville, California. The monthly rent for this facility is approximately $ 5,000 . Phillip W. Oldridge, the Company’s Chief Executive Officer and Chairman of the Board, and a member of its board of directors, is a director of ABCI. The Company recorded rent expense of $ 68,400 for the year ended December 31, 2023 in connection with this agreement. The rent included for a short period in 2023, payments of $ 8,400 for hangar facilities. During 2023, the Company reimbursed Phillip W. Oldridge, the Company’s Chief Executive Officer and Chairman of the Board, and a member of its board of directors, $ 81,269 for use of the CEO's personal airplane for certain business-related activities. During the second quarter of 2023, the Company purchased a vehicle from Phillip W. Oldridge for $ 45,216 , which remains unpaid as of December 31, 2023.to The Company also paid 42Motorsports LTD $ 150,000 for engineering consulting services, the owner of which is a sibling of the Company's Chief Executive Officer and Chairman of the Board. 11. Commitments Other Agreements On December 31, 2021, the Company entered into employment agreements with Phillip W. Oldridge (the “Oldridge Agreement”), its Chief Executive Officer, and with Susan M. Emry (the “Emry Agreement”), its Executive Vice President. According to the Oldridge Agreement, effective as of March 1, 2021, Mr. Oldridge will receive an annual base salary of $ 300,000 , payable in semi-monthly installments consistent with the Company’s payroll practices. Mr. Oldridge will also receive participation in medical insurance, dental insurance, and the Company’s other benefit plans. Under the Oldridge Agreement, Mr. Oldridge will also receive an amount equal to five percent of the net income of the Company on an annual basis and will be eligible for a bonus at the sole discretion of the Company’s Board of Directors (the “Board”). The Oldridge Agreement also provides for an automobile monthly allowance of $ 1,500 . Mr. Oldridge’s employment shall continue until terminated in accordance with the Oldridge Agreement. If Mr. Oldridge is terminated without cause or if he terminates his employment for good reason, Mr. Oldridge will be entitled to receive (i) one -year of base salary, (ii) reimbursement of reimbursable expenses in accordance with the Oldridge Agreement, (iii) any bonus that would have been payable within the twelve months following the date of termination, and (iv) the value of any accrued and unused paid time off as of the date of termination. According to the Emry Agreement, effective on January 1, 2022, Mrs. Emry will receive an annual base salary of $ 200,000 and will be eligible for a bonus at the sole discretion of the Board. Mrs. Emry will also receive participation in medical insurance, dental insurance, and the Company’s other benefit plans. Mrs. Emry’s employment shall continue until terminated in accordance with the Emry Agreement. If Mrs. Emry is terminated without cause or if she terminates her employment for good reason, Mrs. Emry will be entitled to receive (i) one -year of base salary, (ii) reimbursement of reimbursable expenses in accordance with the Emry Agreement, and (iii) the value of any accrued and unused paid time off as of the date of termination. There are no future minimum payments under the terms of both agreements as each party has a right to terminate the agreement without any contractual payments other than what has been stated in their respective contracts. In March 2023, the Company entered into an agreement with Berthaphil to sublease approximately 3,600 square yards of a warehouse building based in the Clark Freeport Zone in the Philippines. The term of the lease is two years and two months with a turnover date of July 1, 2023 and a rental commencement of September 1, 2023. The Company intends to use the leased space as a production facility as it seeks to expand its business presence in the region and the United States. See Note 13 - Leases for further disclosures. 12. Contingencies Except as set forth below, we know of no material, existing or pending, legal proceedings against our Company, nor are we involved as a plaintiff in any material proceeding or pending litigation. There are no proceedings in which any of our directors, officers or affiliates, or any registered or beneficial stockholder of more than 5% of our common stock, or any associate of any of the foregoing persons, is an adverse party or has a material interest adverse to our interest. GreenPower Litigation On December 17, 2019, GreenPower Motor Company Inc., a public company incorporated under the laws of British Columbia (“GreenPower”), of which Phillip W. Oldridge, the Company’s Chief Executive Officer and Chairman of the Board, and a member of its board of directors, previously served as a senior officer and a member of its board of directors, filed a notice of civil claim, captioned GreenPower Motor Company Inc. v. Phillip Oldridge et al., Action No. S- 1914285, in the Supreme Court of British Columbia, against Phillip Oldridge, his trust, EVT and certain other companies affiliated therewith. On February 2, 2020, the Company and the other companies affiliated therewith named in the notice of civil claim filed a response to the civil claim in which they denied certain of the allegations. Fact discovery, through document disclosure and examinations for discoveries, in this matter remain ongoing. We believe that the lawsuit is without merit and intend to vigorously defend the action. On or about July 18, 2021, GreenPower and GP GreenPower Industries Inc. (collectively “the GreenPower entities”), filed a counterclaim against David Oldridge, Phillip Oldridge, the Company and other companies in Supreme Court of British Columbia Action No. S207532. The pleadings in this lawsuit have not closed and the Company intends to vigorously defend the counterclaim. On February 8, 2022, GreenPower Motor Company, Inc., a Delaware corporation, and GreenPower Motor Company Inc., a Canadian corporation, filed a complaint captioned GreenPower Motor Company, Inc. v. Phillip Oldridge, et al., Case No. 5:22 -cv- 00252 in the United States District Court for the Central District of California. The complaint’s allegations are centered around the same assertions in the pending Canadian litigation. On May 10, 2022, the Company, together with other defendants, filed a Motion to Dismiss and/or Stay the lawsuit in the United States District Court for the Central District of California pending the outcome of the Canadian litigation. The Court issued stay of this case pending resolution of parallel litigation in Canada between similar parties. GreenPower and defendants have agreed that the U.S. GreenPower case will not proceed while Canadian litigation is pending. The Company believes that the lawsuit is without merit and intend to vigorously defend the action. 13. Leases Operating leases The Company has active operating lease arrangements for office space and warehouse facilities. The Company is typically required to make fixed minimum rent payments relating to its right to use the underlying leased assets. Although these leases have terms that are either month-to-month or terms that are one year or less (with renewal options), the Company concluded in the fourth quarter of 2023 that the term renewal options are reasonably certain to be exercised. As a result of changes in certain circumstances related to some of the Company's short-term leases, the Company was required to classify such leases as operating leases in accordance with the provisions of ASC 842 - Leases. Therefore, the Company recognized operating lease liabilities with corresponding Right-Of-Use ("ROU") assets based on the present value of the minimum rental payments of such leases during the fourth quarter of 2023. In March 2023, the Company entered into an agreement with Berthaphil, Inc. to sublease approximately 3,600 square yards of a warehouse building based in the Clark Freeport Zone in the Philippines. The term of the lease is two years and two months with a turnover date of July 1, 2023 ( "turnover date") and a rental commencement of September 1, 2023. However, the warehouse building was not available for use to the Company till the early part of the fourth quarter of 2023. Therefore, the commencement date is deferred until the fourth quarter of 2023, which is when the Company was given access to use the warehouse building. There is a grace period of two months for rental payments starting from the turnover date. The monthly rent for the first year is $ 15,000 , escalating to $ 15,750 for the second year and $ 16,530 for the remaining term. In addition to the monthly rent, the Company is required to pay an additional 5 % of the monthly rent as common area maintenance costs. The sublease may be renewed for an additional period that is mutually agreed upon subject to certain terms and conditions. The Company intends to use the leased space as a production facility as it seeks to expand its business presence in the region and the United States. The Company accounted for this lease as an operating lease under ASC Topic 842 and recorded an operating lease liability and a corresponding ROU asset for this lease. The Company's lease agreements do not provide an implicit borrowing rate. Therefore, the Company used a benchmark approach to derive an appropriate incremental borrowing rate. The Company benchmarked itself against other companies of similar credit ratings and comparable credit quality and derived an incremental borrowing rate to discount each of its lease liabilities based on the remaining lease terms. ROU assets at December 31, 2023 were $ 538,932 . Short-term and long-term operating lease liabilities were $ 291,263 and $ 235,625 at December 31, 2023, respectively. As required by ASC 842, in conjunction with the Corona, California lease, the Company recognized an operating liability with a corresponding ROU asset of the same amounts based on the present value of the minimum rental payments of such lease. As of March 31, 2022, the ROU asset and related liability accounts were written off against each other due to the Company leaving the Corona California office and warehouse effective April 1, 2022 and to Masters taking over the remaining lease obligation for the facility. Quantitative information regarding the Company’s leases is as follows: Year Ended December 31, 2023 2022 Lease expenses Operating lease expenses $ 89,268 $ 61,380 Short-term lease expenses $ 188,921 $ 167,367 Total lease cost $ 278,189 $ 228,747 Other information Cash paid for the amounts included in the measurement of lease liabilities for operating leases: Operating cash flows $ 101,312 $ 45,767 Weighted-average remaining lease term (in years): Operating leases 1.70 — Weighted-average discount rate: Operating leases 14 % 14 % 56 Table of Contents As of December 31, 2023, future minimum lease payments required under operating leases are as follows: 2024 $ 346,972 2025 248,873 Total payments $ 595,845 14. Subsequent Events The Company evaluates subsequent events through March 28, 2024, which is the date the financial statements were issued or available to be issued. There are two types of subsequent events: ( 1 ) recognized, or those that provide additional evidence with respect to conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements, and ( 2 ) non-recognized, or those that provide evidence with respect to conditions that did not exist at the date of the balance sheet but arose subsequent to that date. During the first quarter of 2024, the Company issued 348,889 shares of its common stock for proceeds of $ 585,500 to various parties. The weighted average issue price per share of common stock sold was approximately $ 1.68 . The proceeds will be used to fund the Company's operations. The Company also entered into a convertible note agreement for $ 1,000,000 with an unrelated third -party investor. The origination fee of this note was $ 99,000 . The maturity date of the note is the earlier of the next S- 1 filing or September 30, 2024. The investor is entitled to convert the note into common stock at the greater of $ 1.50 per share or at 90 % of the share price on the maturity date. The investor also has a security interest in the Company's assets in the event of non-payment of the debt. On March 18, 2024, the Company entered into a Sale and Purchase Agreement (the "Agreement") with PlugD Commercial Electric Leasing and Rentals Inc. ("PlugD"), a Texas-based commercial electric vehicle leasing company. Under the terms of the Agreement, the Company will deliver 200 electric high roof vans and trucks to PlugD for a total of approximately $ 16.2 million. The sale will take place over the next 13 months. 57 Table of Contents Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.