EvoAir Holdings Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Forward-looking Statements This quarterly report contains forward-looking statements relating to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may”, “should”, “intends”, “expects”, “plans”, “anticipates”, “believes”, “estimates”, “predicts”, “potential”, or “continue” or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors which may cause our or our industry’s actual results, levels of activity or performance to be materially different from any future results, levels of activity or performance expressed or implied by these forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity or performance. You should not place undue reliance on these statements, which speak only as of the date that they were made. These cautionary statements should be considered with any written or oral forward-looking statements that we may issue in the future. Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results, later events or circumstances or to reflect the occurrence of unanticipated events. In this report unless otherwise specified, all dollar amounts are expressed in United States dollars and all references to “common shares” refer to the common shares of our capital stock. The management’s discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with U.S. GAAP. General Overview Unex was incorporated in the State of Nevada on February 17, 2017 and was formed to provide geodesy services. On December 20, 2021, EvoAir International transferred its HVAC business to Unex. The Company through its subsidiaries upon completion of the Transactions (defined hereunder), is engaged in the sale of (“HVAC”) products in Asia. EvoAir International is a company incorporated in the BVI on November 17, 2021 and the parent company of WKL Eco Earth Holdings, WKL Eco Earth, WKL Green Energy, EvoAir Manufacturing, WKL EcoEarth Indochina, WKL Guanzhe and Evo Air Marketing (M) Sdn. Bhd. (“Evo Air Marketing”) (together with Unex, EvoAir International, to be referred to as the “WKL Group” or “the Group”). The WKL Group is principally engaged in the research and development, manufacturing sale and marketing of HVAC products for residential, commercial and industrial uses. The WKL Group operates manufacturing plants and assembly lines in China and Malaysia in order to develop and manufacture its HVAC products, totaling approximately 60,000 square feet of manufacturing space. With the rise of the Covid-19 pandemic, the Group has been engaged as an authorized exclusive distributor of the INCU branded Ionic Nano Copper Solution Technology (“INCU Technology”). The Group partners with various original equipment manufacturers (“OEMs”) in producing air purifier products that incorporate the INCU Technology under the brand e-CondLife, as well as distributes the INCU Technology to other brands for incorporation into their products. Results of Operations The following summary of our operations should be read in conjunction with our unaudited condensed consolidated financial statements for the three and nine months ended May 31, 2022, as compared to the three and nine months ended May 31, 2021. 19 | Page Three months Quarter Ended May 31, 2022, versus Three months Quarter Ended May 31, 2021 Three Months Ended May 31, 2022 2021 Changes % Revenue $ 194,954 $ 171,798 $ 23,156 13 % Cost of revenue 173,842 95,953 77,889 81 % Gross profit / (loss) 21,112 75,845 (54,733 ) (72 )% Operating expenses (1,440,623 ) (245,919 ) 1,194,704 486 % Loss from operation (1,419,511 ) (170,074 ) (1,249,437 ) 735 % Other expense (9,845 ) - 9,845 100 % Net Loss $ (1,429,356 ) $ (170,074 ) (1,259,282 ) 740 % The Company generated revenues of $194,594 in the three months ended May 31, 2022 as compared to $171,798 in the same financial period for 2021, a change in revenue of $23,156. The three month change of the sales is attributable to the expansion of customers base, increase of sales from existing customers and expansion of product offering of evoair TM line of products. Cost of revenue was $173,842 or 89% of revenue in the three months ended May 31, 2022 as compared to $95,953 or 56% of revenue in the same financial period for 2021. Cost of revenues includes production costs and purchases of goods. Higher cost of revenue is attributable to manufacturing and related costs for evoair TM products, comprising material costs, labor cost, research and development (“R&D”) for product improvement, product testing and inspection, factory rental, depreciation expense as well as sample products for market penetration. Gross profit was $21,112 or 11% of revenue for the three months ended May 31, 2022 as compared to gross profit of $75,845 in the same financial period in 2021 or 44% of revenues. The decrease of gross profit in 2022 is attributable to the commercialization of evoair products TM with higher cost of revenue from manufacturing and related costs as well as lack of economy of sales during commercialization stage. The Company anticipates improvement of income and gross profit margin with the improvement of revenue streams from distributor and dealership model and projects. Operating expenses were $1,440,623 for the three months ended May 31, 2022 compared to $245,919 in the corresponding period in 2021, an increase of $1,194,794. The increases in operating expenses were in line with the growth in business operations and business development, professional fee and compliance cost in relation to our financial reporting, patent and trademark filings. The net loss for the three months ended May 31, 2022 was $1,429,356 as compared to $170,074 for the corresponding period in 2021. The continuous net loss is attributable to the Group’s focused effort in creating the infrastructure and resource to meet the business expansion needs of the Group’s as well as lack of economies of scale. Nine Months Quarter Ended May 31, 2022, versus Nine months Quarter Ended May 31, 2021 Nine Months Ended May 31, 2022 2021 Changes % Revenue $ 1,306,717 $ 393,029 $ 913,688 232 % Cost of revenue 1,075,841 (213,179 ) 862,662 405 % Gross Profit 230,876 179,850 51,026 28 % Operating expenses (3,253,759 ) (985,295 ) 2,268,464 230 % Loss from operation (3,022,883 ) (805,445 ) (2,217,438 ) 275 % Other (expense)/ income (978,203 ) 1,449 (979,652 ) (67,609 )% Net Loss $ (4,001,086 ) $ (803,996 ) (3,197,090 ) 398 % The Company generated revenue of $1,306,717 for the nine months ended May 31, 2022 as compared to $393,029 in the corresponding financial period in 2021, an increase in revenues of $913,688 which is attributable to the expansion of customers base, increase of sales from existing customers and expansion of product offerings of evoair TM line of products. 20 | Page Cost of revenues was $1,075,841 or 82% of revenues in the nine months ended May 31, 2022 as compared to $213,179 or 54% of revenue in the corresponding period in 2021. Cost of revenues includes production cost and purchases of goods. Higher cost of revenue is attributable to manufacturing and related costs for evoair TM products, comprising material costs, labor cost, R&D for product improvement, product testing and inspection, factory rental, depreciation expense as well as sample products for market penetration. Gross profit was $230,876 or 18% of revenue for the nine months ended May 31, 2022 as compared to $179,850 in the corresponding period in 2021 or 46% of revenue. The decrease of gross profit in 2022 is attributable to the commercialization of evoair products TM with higher cost of revenue from manufacturing and related costs as well as lack of economy of sales during commercialization stage. The Company anticipates improvement of income and gross profit margin with improvement of revenue streams from distributor and dealership model and projects. Operating expenses were $3,253,759 for the nine months ended May 31, 2022 compared to $985,295 in the corresponding period in 2021, an increase of $2,268,464. Increased in operating expense was in line with the growth in business operations and business development, professional fee and compliance cost in relation to our financial reporting, patent and trademark filings. Other expense were $978,203 for the first nine months ended May 31, 2022, including amortization of beneficial conversion feature of convertible bonds $1,005,645, and $154 interest expense, offset with other income $27,596. The net loss for the first nine months ended May 31, 2022 was $4,001,086 as compared to $803,996 for the corresponding period in 2021. The continuous net loss is attributable to the infrastructure and resource to meet the business expansion needs of the Group’s as well as lack of economies of scale. Liquidity and Capital Resources Working Capital As of As of May 31, August 31, 2022 2021 Changes % Current Assets $ 2,600,987 $ 3,224,772 $ (623,785 ) (19 )% Current Liabilities 1,004,967 1,665,879 (660,912 ) (40 )% Working Capital 1,596,020 1,558,893 37,127 2 % As at May 31, 2022, our company’s liabilities stood at $1,004,967, which included accounts payable and accruals of $27,013, other payable of $881,654, hire purchase creditor $30,975, amount due to shareholders $20,735 and current portion operating lease liabilities of $44,590, and the non-current portion operating lease liabilities of $458,470. As at May 31, 2022 our company had a positive working capital of $1,596,020 compared with the positive working capital of $1,558,893 as at August 31, 2021. The increase in working capital was primarily due to a decrease in convertible bonds balance at current financial period end. Cash Flows May 31, May 31, 2022 2021 Changes % Cash flows (used in)/ generated from operating activities $ (1,023,037 ) $ 1,332,891 (2,355,928 ) (177 )% Cash flows used in investing activities (566,734 ) (14,968 ) (551,766 ) 3,686 % Cash flows generated from financing activities 185,185 - 185,185 100 % Net changes in cash (1,404,586 ) 1,317,923 (2,722,509 ) (207 )% The Company’s cash and cash equivalents stood at $465,719 as of May 31, 2022. Cash used in operating activities for the nine months ended May 31, 2022, was $1,023,037. This resulted primarily from a net loss of $4,001,086 which was offset by depreciation of $59,987, amortization of $1,778,828, beneficial conversion feature $1,005,645, operating lease $22,321, increase in inventories of $408,290, decrease in deposit, prepayment and advances to supplier of $194,879, decrease in other receivables of $66,824, decrease in account payable and accruals of $514,333, increase in other payable of $848,576 and decrease in amount due to related party of $31,746. 21 | Page Cash used in investing activities resulted from purchase of fixed assets amounting to $566,734 for the nine months ended May 31, 2022. Cash generated from financing activities resulted from the proceeds from capital raising amounting to $185,185 during the nine months ended May 31, 2022 Seasonality The Company’s business is not subject to seasonality. Off-Balance Sheet Arrangements. The Company has no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on its financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. Critical Accounting Policies Revenue recognition Our revenue recognition policy is in compliance with ASC 606, Revenue from Contracts with Customers that revenue is recognized when a customer obtains control of promised goods and is recognized in an amount that reflects the consideration that we expect to receive in exchange for those goods. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The amount of revenue that is recorded reflects the consideration that we expect to receive in exchange for those goods. We apply the following five-step model in order to determine this amount: (i) identification of the promised goods and services in the contract; (ii) determination of whether the promised goods and services are performance obligations, including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation. We only apply the five-step model to contracts when it is probable that we will collect the consideration we are entitled to in exchange for the goods or services we transfer to the customer. Once a contract is determined to be within the scope of ASC 606 at contract inception, we review the contract to determine which performance obligations we must deliver and which of these performance obligations are distinct. We recognize as revenues the amount of the transaction price that is allocated to the respective performance obligation when the performance obligation is satisfied or as it is satisfied. Generally, our performance obligations are transferred to customers at a point in time, typically upon delivery for local sales and upon shipment of the products for export sale. For all reporting periods, we have not disclosed the value of unsatisfied performance obligations for all product revenue contracts with an original expected length of one year or less, which is an optional exemption that is permitted under the adopted rules. Estimates and Assumptions In preparing our unaudited condensed consolidated financial statements, we use estimates and assumptions that affect the reported amounts and disclosures. Our estimates are often based on complex judgments, probabilities and assumptions that we believe to be reasonable, but that are inherently uncertain and unpredictable. We are also subject to other risks and uncertainties that may cause actual results to differ from estimated amounts. Significant estimates in 2022 and 2021 include the assumptions used to value tax liabilities, derivative financial instruments, the estimates of the allowance for deferred tax assets, the accounts receivable allowance, impairment of intangible assets and long-lived assets and inventory write-offs. 22 | Page Due to the COVID-19 pandemic, there has been uncertainty and disruption in the global economy and financial markets which could impact our estimates and assumptions. We have assessed the impact and are not aware of any specific events or circumstances that required an update to our estimates and assumptions or materially affected the carrying value of our assets or liabilities as of the date of issuance of this Quarterly Report on Form 10-Q. These estimates may change as new events occur and additional information is obtained. Actual results could differ materially from these estimates under different assumptions or conditions. Going Concern As of May 31, 2022 and August 31, 2021, the Company had an accumulated deficit of $5,906,875 and $2,233,496 respectively. The Company incurred net loss of $4,001,086 and $803,996 for nine months ended May 31, 2022 and May 31, 2021, respectively. The cash used in operating activities for the nine months ended May 31, 2022, was $1,023,037. It was brought to the attention of the Management to assess going concern considering all facts and circumstances about the foreseeable future of the Company as well as its assets and liabilities on the basis that it will be able to realize and discharge them in the normal course of business. With the injection of New Business into the Company contemplated under the Transactions (defined in Note 1), the Management believes that the actions to be taken by the Management to further implement the business plans for the New Business including expansion in product offerings, geographical expansion, generate revenue through expansion of revenue streams and customer base (retail, commercial and industrial as well as private label and licensing clientele), as well as improvement of profitability by achieving economies of scale provide the opportunity for the Company to continue as a going concern. In addition, the Company is also working on raising additional funding to finance the operations as well as business expansion. The unaudited condensed consolidated financials have been prepared assuming that the Company will continue as a going concern and, accordingly the financial statements do not include any adjustments related to the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. Material Commitments We have no material commitments as of May 31, 2022. Off-Balance Sheet Arrangements As of the date of this Quarterly Report, we do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. Recent Accounting Pronouncements Except for rules and interpretive releases of the SEC under the authority of federal securities laws and a limited number of grandfathered standards, the FASB ASC is the sole source of authoritative US GAAP literature recognized by the FASB and applicable to the Company. Management has reviewed the aforementioned rules and releases and believes any effect will not have a material impact on the Company’s present or future financial statements. In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires contract assets and contract liabilities acquired in a business combination to be recognized and measured by the acquirer on the acquisition date in accordance with ASC 606, Revenue from Contracts with Customers. This ASU should be applied prospectively to acquisitions occurring on or after the effective date of December 15, 2022, and early adoption is permitted. There is no material impact on the Company’s financial statements. In June 2016, the FASB issued ASU No. 2016-13 “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”; In November 2019, the FASB issued ASU No. 2019-10 “Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates”; In March 2020, the FASB issued ASU No. 2020-03 “Codification Improvements to Financial Instruments”; which modifies the measurement of expected credit losses of certain financial instruments. This ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2022. The Company is currently assessing the impact of these ASUs on its consolidated financial statements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As a “smaller reporting company”, we are not required to provide the information required by this Item.