AZIO AI HOLDINGS, INC. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of our financial condition and the results of operations should be read in conjunction with the unaudited consolidated financial statements and notes thereto included in this Quarterly Report on Form 10-Q (“Quarterly Report”). This discussion contains forward-looking statements that are subject to known and unknown risks, uncertainties, and other factors that may cause our actual results to differ materially from those expressed or implied by such forward-looking statements. These risks, uncertainties, and other factors include, among others, those identified under the “Cautionary Statement Regarding Forward-Looking Statements” above, and elsewhere in this Quarterly Report, particularly in Part II, Item 1A “Risk Factors,” below. Overview We are a provider of purpose-built zero-emission electric vehicles focused on reducing the total cost of vehicle ownership and helping fleet operators unlock the benefits of green technology. We serve commercial and last-mile fleets, school districts, public and private transportation service companies and colleges and universities to meet the increasing demand for light to heavy-duty electric vehicles. Our vehicles address the challenges of traditional fuel price instability and local, state and federal regulatory compliance. For the three and six months ended June 30, 2021 and 2020, our net losses were $893,079 and $1,551,589, respectively. As discussed in Item 1, Notes 2 and 3 to the unaudited consolidated financial statements contained in this Quarterly Report on Form 10-Q, as a result of the closing of the Merger on March 15, 2021, the historical results discussed in this section of the Quarterly Report on Form 10-Q are those of Envirotech Drive Systems, Inc. (“EVTDS”) as of and for the periods ended June 30, 2020 and are the results for EVTDS as of and for the three and six months ended June 30, 2021, including the balance sheet accounts of Envirotech Vehicles, Inc. at June 30, 2021 and the results of operations of Envirotech Vehicles, Inc. for the period March 16, 2021 through June 30, 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. 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 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 and we have developed, and continue to develop, plans to address the ongoing effects and help mitigate the potential negative impact of the pandemic on our business. Availability of government subsidies, rebates and economic incentives. We believe that the availability of government subsidies, rebates, and economic incentives is currently a critical factor considered by our customers when purchasing our zero-emission systems or converting their existing vehicles to zero-emission-electric or hybrids, and that our growth depends in large part on the availability and amounts of these subsidies and economic incentives. As an alternative to being dependent on such funding, however, we are exploring the possibility of leasing our vehicles to our customers as well. New customers. We are competing with other companies and technologies to help fleet managers and their districts/companies more efficiently and cost-effectively manage their fleet operations. Once these fleet managers have decided they want to buy from us, we still face challenges helping them obtain financing options to reduce the cost barriers to purchasing. We may also encounter customers with inadequate electrical services at their facilities that may delay their ability to purchase from us. 20 Investment in growth. We plan to continue to invest for long-term growth. We anticipate that our operating expenses will increase in the foreseeable future as we invest in research and development to enhance our zero-emission electric vehicles and systems; design, develop and manufacture our commercial fleet vehicles and their components; increase our sales and marketing to acquire new customers; and increase our general and administrative functions to support our growing operations. We believe that these investments will contribute to our long-term growth, although they will adversely affect our results of operations in the near term. In addition, the timing of these investments can result in fluctuations in our annual and quarterly operating results . Zero-emission electric vehicle experience. Our dealer and service network is not currently completely established, although we do have certain agreements in place. One issue they may have, and we may encounter, is finding appropriately trained technicians with zero-emission electric fleet vehicle experience. Our performance will depend on having a robust dealer and service network, which will require appropriately trained technicians to be successful. Because vehicles that utilize our technology are based on a different technology platform than traditional internal combustion engines, individuals with sufficient training in zero-emission electric vehicles may not be available to hire, and we may need to expend significant time and expense training the employees we do hire. If we are not able to attract, assimilate, train or retain additional highly qualified personnel in the future, or do so cost-effectively, our performance would be significantly and adversely affected. Market growth. We believe the market for all-electric solutions for alternative fuel technology, specifically all-electric vehicles, will continue to grow as more purchases of new zero-emission vehicles and as more conversions of existing fleet vehicles to zero-emission vehicles are made. However, unless the costs to produce such vehicles decrease dramatically, purchases of our products will continue to depend in large part on financing subsidies from government agencies. We cannot be assured of the continued availability, the amounts of such assistance to our customers, or our ability to access such funds. Sales revenue growth from additional products . We seek to add to our product offerings additional zero-emission vehicles of all sizes to be marketed, sold, warrantied and serviced through our developing distribution and service network, as well as add other ancillary products discussed elsewhere in this report. Sales revenue growth from additional geographic markets. We believe that growth opportunities for our products exist internationally, as well. Our future performance will depend in part upon the growth of these additional markets. Accordingly, our business and operating results will be significantly affected by our ability to timely enter and effectively address these emerging markets and the speed with which and extent to which demand for our products in these markets grows. Third-party contractors, suppliers and manufacturers. We rely upon third parties to supply us with raw materials, parts, components and services in adequate quantity in a timely manner and at reasonable prices, quality levels, and volumes acceptable to us. Components of Results of Operations Sales Sales are recognized from the sales of new, purpose-built zero-emission electric vehicles and from providing vehicle maintenance and safety inspection services. Sales are recognized in accordance with Accounting Standards Codification (“ASC”) Topic 606, as discussed in Note 2 to our unaudited consolidated financial statements included in this Quarterly Report. Cost of Sales Cost of sales includes those costs related to the development, manufacture, and distribution of our products. Specifically, we include in cost of sales each of the following: material costs (including commodity costs); freight costs; labor and other costs related to the development and manufacture of our products; and other associated costs. Cost of sales also includes costs related to the valuation of inventory due to impairment, obsolescence, or shrinkage. 21 General and Administrative Expenses Selling, general and administrative expenses include all corporate and administrative functions that support our company, including personnel-related expense and stock-based compensation costs; costs related to investor relations activities; warranty costs, including product recall and customer satisfaction program costs; consulting costs; marketing-related expenses; and other expenses that cannot be included in cost of sales. Consulting and Research and Development Costs These expenses are related to our consulting and research and development activity. Other Income/Expenses, Net Other income/expenses include non-operating income and expenses, including interest income and expense. Provision for Income Taxes We account for income taxes in accordance with Financial Accounting Standards Board (“FASB”) ASC 740 “Income Taxes,” which requires the recognition of deferred income tax assets and liabilities for the future tax consequences attributable to differences between the financial statements carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under FASB ASC 740, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period the enactment occurs. A valuation allowance is provided for certain deferred tax assets if it is more likely than not that we will not realize tax assets through future operations. Because we have incurred only losses to this point, no provision for income taxes has been made in 2021, and the income tax benefit recorded in 2020 has been reversed and effectively reserved as well. Results of Operations The following discussion compares operating data for the three and six months ended June 30, 2021 to the corresponding periods ended June 30, 2020: Sales Sales were $188,266 and $2,000 for the three months ended June 30, 2021 and 2020, respectively, and $659,059 and $88,735 for the six months ended June 30,2021 and 2020, respectively, Sales for the three and six months ended June 30, 2021 consisted of four cargo vans sold to ADOMANI, Inc. prior to the closing of the Merger, a box truck sold to the Pittsburg, California Unified School District, a complete cargo van and a cab and chassis truck sold to two different factory authorized representatives, and maintenance and inspection services provided. Cost of Sales Cost of sales were $147,932 and $250 for the three months ended June 30, 2021 and 2020, respectively, and $461,366 and $73,560 for the six months ended June 30, 2021, respectively. Cost of sales for the three and six months ended June 30, 2021 consisted of the costs related to the sale of the vehicles sold as described above and the costs of providing maintenance and inspection services. General and Administrative Expenses General and administrative expenses were $836,246 and $78,605 for the three months ended June 30, 2021 and 2020, respectively, an increase of $757,641. The increase was related primarily to payroll-related expenses of $222,875; to legal and professional fees of $157,373; to rent of $87,628; to insurance of $81,460; to investor relations expenses of $43,110; to advertising and marketing costs of $29,706; to travel costs of $27,488; to depreciation of $27,379, and to $ 80,622 in other general and administrative expenses. 22 General and administrative expenses were $ 1,422,149 and $168,791 for the six months ended June 3 0 , 202 1 and 20 20, respectively, an increase of $1,253,358 . The increase was related primarily to legal and professional fees of $445,302 , of which approximately $290,000 related to the M erger . Increases in payroll - related expenses of $250,172; rent of $ 134,897 ; insurance of $101,027; accounting services of $100,842; investor relations expenses of $44,478; depreciation of $35,376 ; and $ 141,264 in other general and administrative expenses accounted for the remainder of the increase. Consulting Expenses Consulting expenses were $95,108 and $16,800 for the three months ended June 30, 2021 and 2020, respectively, and were $105,358 and $37,300 for the six months ended June 30, 2021 and 2020, respectively. This increase was due primarily to payments to temporary professional firms to support operations and accounting activities of the Company due to vacant internal staff positions. Liquidity and Capital Resources As discussed above and in Note 3 to the unaudited consolidated financial statements contained in this Quarterly Report on Form 10-Q, ADOMANI, Inc. had approximately $3.4 million in cash and cash equivalents at the Merger closing date, primarily the result of the approximately $5.3 million net proceeds from the December 2020 closing of the Financing discussed below. EVTDS delivered $5 million cash at the Merger closing. As of June 30, 2021, we had cash and cash equivalents of $8,542,199 and marketable securities of $12,010,190, a combined total of $20,552,389 We believe that our existing cash, cash equivalents and marketable securities will be sufficient to fund our operations during the next eighteen months and beyond. However, we may not successfully execute our business plan, and if we do not, we may need additional capital to continue our operations and support the increased working capital requirements associated with the fulfillment of purchase orders. On December 24, 2020, ADOMANI, Inc. entered into a Securities Purchase Agreement (the “Purchase Agreement”) with certain institutional and accredited investors, whereby the Company agreed to sell, and the investors agreed to purchase, shares of common stock of the Company, and warrants (the “Warrants”) to purchase additional shares of the Company’s common stock (the “Financing”). The first closing of the Financing occurred on December 29, 2020. ADOMANI, Inc. raised net cash proceeds, net of offering costs of approximately $5.3 million through the sale and issuance of 11,500,000 shares of its common stock at a purchase price equal to $0.50 per share and Warrants to purchase up to an aggregate of 8,625,001 shares of its common stock at an exercise price of $0.50 per share. The share and warrant amounts issued include 650,000 shares and 487,500 warrants issued to the underwriter in lieu of paying $325,000 of fees in cash. The second closing of the Financing was completed on May 7, 2021. The Company raised net cash proceeds, net of offering costs, of approximately $16.3 million through the sale and issuance of 38,333,333 shares of common stock at a purchase price equal to $0.45 per share and Warrants to purchase up to an aggregate of 19,166,667 shares of its common stock at an exercise price of $1.00 per share. The share and warrant amounts issued include 2,166,666 shares and 1,083,330 warrants to be issued to the underwriter in lieu of paying $975,000 of fees in cash. Options to Purchase Common Stock Because all outstanding unvested options to purchase ADOMANI, Inc.’s common stock became fully vested upon the closing of the Merger, the Company has 12,398,571 fully vested options outstanding as of June 30,2021. See Notes 2, 3 and 8 to the unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q. As of June 30, 2021, the 12,398, 571 vested options were comprised of options to purchase 5,000,000 shares with an exercise price of $0.10 per share; options to purchase 1,358,571 shares with an exercise price of $0.12 per share; options to purchase 5,770,000 shares with an exercise price of $0.45 per share, and 270,000 shares with an exercise price of $1.31 per share. If all vested options to purchase common stock were exercised, we would receive proceeds of approximately $3.6 million and we would be required to issue 12,398,571 shares of common stock. There can be no assurance, however, that any such options will be exercised. See Notes 2, 3, 8 and 13 to the unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q. 23 Credit Facilities Effective May 2, 2018, the Company secured a line of credit from Morgan Stanley Private Bank, National Association (“Morgan Stanley”). Borrowings under the line of credit bear interest at 30-day LIBOR plus 2.0%. There is no maturity date for the line, but Morgan Stanley 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 Morgan Stanley accounts, which was approximately $5.7 million as of March 31, 2021. Borrowings under the line may not exceed 95% of such cash, cash equivalents, and marketable securities balances. The maximum amount the Company could borrow at June 30, 2021, was approximately $17.1 million; there was no principal amount outstanding at that date. The line of credit and related interest expense was repaid in full on February 3, 2020. The line of credit is still available to the Company, but there is no current plan to use 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. Cash Flows The following table summarizes our cash flows from operating, investing, and financing activities for the six months ended June 30, 2021 and 2020: Six Months Ended June 30, 2021 June 30, 2020 Consolidated Statements of Cash Flow Data: Net cash used in operating activities $ (6,817,467 ) $ (325,417 ) Net cash used in investing activities (8,809,744 ) (30,166 ) Net cash provided by financing activities 22,239,279 49,990 Net change in cash and cash equivalents $ 6,612,068 $ (305,593 ) Operating Activities Cash used in operating activities is primarily the result of our operating losses, reduced by the impact of non-cash expenses. These numbers are further impacted by adjustments for changes in other balance sheet accounts. Net cash used in operating activities increased by $6,492,050 to $6,817,467 for the six months ended June 30, 2021 compared to net cash used in operating activities of $325,417 for the six months ended June 30, 2020. The increase in net cash used in operating activities was due primarily to our net loss increasing to $1,551,589 over the net loss of $183,915 for the six months ended June 30, 2020, or by $1,367,674 and to a net increase in operating assets and liabilities that required the use of $5,291,064 of cash. Approximately $2,877,875 of this amount related to deposits made to our supplier related to the order of new vehicles for inventory. $1,208,657 of the use of cash for operating assets related to purchases of inventory that were received during the six months ended June 30, 2021. The remaining $1,204,532 related primarily to cash used to reduce accounts payable and accrued liabilities, which was partially offset by changes in the other balance sheet accounts. 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 expense we incur to satisfy future warranty claims. 24 Investing Activities Net cash used by investing activities during the six months ended June 30, 2021 was $8,809,744 as compared to $30,166 used by investing activities during the six months ended June 30, 2020. The $8,779,578 increase in net cash used by investing activities during the six months ended June 30, 2021 is due to the $12.0 million purchase of marketable securities, reduced by the $3.4 million of cash acquired in the Merger and by capital expenditures of $183,076. Financing Activities Net cash provided by financing activities during the six months ended June 30, 2021 was $22,239,279 as compared to $49,990 provided by financing activities during the six months ended June 30, 2020. Net cash provided by financing activities during the six months ended June 30, 2021 consisted of $6,415,110 proceeds from the issuance of common stock by EVTDS, and $16,322,049 proceeds from the issuance of common stock by the Company in May, 2021 when the second tranche of the Financing discussed above closed. The combined financing proceeds of $22,737,159 were reduced by offering costs of $188,015 and were further reduced by both EVTDS and ADOMANI, Inc. repaying their SBA EIDL loans and accrued interest in the amounts of $152,835 and $157,030, respectively. Contractual Obligations Except as set forth below, during the six months ended June 30, 2021, there were no material changes in our contractual obligations and commitments as described in the audited financial statements of Envirotech Drive Systems, Inc. for the year ended December 31, 2020 included in ADOMANI, Inc.’s Current Report on Form 8-K/A filed with the SEC on April 22, 2021, or as described in Part II, Item 7 of the ADOMANI, Inc. Annual Report on Form 10-K for the fiscal year ended December 31, 2020, as amended by ADOMANI, Inc.’s Amendment No. 1 to Annual Report on Form 10-K/A, as filed with the SEC on April 28, 2021. 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. Contingencies Certain conditions may exist as of the date the financial statements are issued, which may result in a loss to us, but which will only be resolved when one or more future events occur or fail to occur. Our management, in consultation with our legal counsel as appropriate, assesses such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against us or unasserted claims that may result in such proceedings, we, in consultation with our legal counsel, evaluates the perceived merits of any legal proceedings or unasserted claims, as well as the perceived merits of the amount of relief sought or expected to be sought therein. If the assessment of a contingency indicates it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in our financial statements. If the assessment indicates a potentially material loss contingency is not probable, but is reasonably possible, or is probable, but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss, if determinable and material, would be disclosed. Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the guarantees would be disclosed. Stock-Based Compensation We measure the cost of services received in exchange for an award of equity instruments based on the fair value of the award. The fair value of the award is measured on the grant date and is then recognized over the period during which services are required to be provided in exchange for the award, usually the vesting period. The fair value of our common stock was estimated by management based on observations of the cash sales prices of its common shares. Awards granted to directors are treated on the same basis as awards granted to employees. Because all outstanding unvested options to purchase common stock became fully vested upon the Merger close and change in control, and 25 because there were no new stock options granted between March 16, 2021 and June 30 , 2021, no stock-based compensation is recorded in the unaudited consolidated financial statements for the three and six months ended June 30 , 2021 included in this Quarterly Report on Form 10-Q. Fair Value Measurement The carrying values of our financial instruments, including cash, notes receivable and accounts payable approximate their fair value due to the short-term nature of these financial instruments. FASB ASC Topic 820, “Fair Value Measurement” 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 for which there is little or no market data, and which require the reporting entity to develop its own assumptions. Other than those items required to be addressed due to the purchase accounting requirements of the reverse acquisition, we do not have any assets or liabilities that are required to be measured and recorded at fair value on a recurring basis. Jumpstart Our Business Startups Act of 2012 (“JOBS Act”) We are an “emerging growth company,” as defined in the JOBS Act. The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for emerging growth companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards, and, therefore, will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies. We have chosen to rely on the other exemptions and reduced reporting requirements provided by the JOBS Act. Subject to certain conditions set forth in the JOBS Act, as an emerging growth company we are not required to, among other things, (i) being permitted to provide only two years of audited financial statements, in addition to any required unaudited interim financial statements, with correspondingly reduced “Management’s Discussion and Analysis of Financial Condition and Results of Operations” disclosure, (ii) not being required to comply with the auditor attestation requirements in the assessment of our internal control over financial reporting, (iii) not being required to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements, (iv) reduced disclosure obligations regarding executive compensation or (v) exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We will retain our emerging growth company status until the first to occur of: (i) the end of the fiscal year in which the fifth anniversary of the completion of our initial public offering occurs, (ii) the end of the fiscal year in which our annual revenues exceed $1.07 billion, (iii) the date on which we issue more than $1 billion in non-convertible debt during any three-year period or (iv) the date on which we qualify as a “large accelerated filer.” 26 ITEM 3. QUANTITATIVE AND QUALITAT IVE DISCLOSURE ABOUT MARKET RISK 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. As we continue our commercialization efforts internationally, we may generate revenue and incur expenses denominated in currencies other than the U.S. dollar, a majority of which we expect to be denominated in Chinese Yuan. As a result, if and when the operations of ADOMANI China, our wholly owned subsidiary organized under the laws of China, expand in the future, which is unlikely, our revenue may be significantly impacted by fluctuations in foreign currency exchange rates. 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 the same foreign currency, which may mitigate our foreign currency exchange risk exposure.