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 EvoAir Holdings Inc. is a corporation established under the corporation laws in the State of Nevada on February 17, 2017. The Company has adopted an August 31 fiscal year end. On December 20, 2021, the Company and Dr. Low entered into the “EvoAir International Share Transfer Agreement, pursuant to which Dr. Low agreed to sell all of his ordinary shares of EvoAir International to the Company for the consideration of US$100 (“EvoAir Transaction”). EvoAir International, through its subsidiaries upon completion of the Transactions, is engaged in the sale of HVAC products in Asia. Pursuant to the terms of a share transfer agreement dated December 20, 2021, Dr. Low, the then sole executive officer and director of the Company and the owner of 2,000,000 restricted shares of the Company’s ordinary shares representing approximately 67.34% of the Company’s then issued and outstanding shares, sold his entire shareholding of the Company to WKL Global for an aggregate consideration of $100. Upon completion of the Change of Control Transaction, WKL Global owned 2,000,000 shares, or approximately 67.34% of the then issued and outstanding ordinary shares of the Company, which resulted in a change of control of the Company. EvoAir International is a company incorporated in the British Virgin Islands on November 17, 2021. Effective from the December 20, 2021, it wholly owns WKL Eco Earth Holdings, a company incorporated in Singapore on July 12, 2018, which in turn wholly owns (a) WKL Eco Earth, a Malaysian company incorporated on May 17, 2017, and (b) WKL Green Energy a Malaysian company incorporated on October 24, 2017. WKL Eco Earth Holdings acquired (c) EvoAir Manufacturing on April 19, 2021, a Malaysian company incorporated on March 22, 2019, as well as acquiring (d) WKL EcoEarth Indochina, a Cambodia company incorporated on February 4, 2021, (e) WKL Guanzhe Green Technology Guangzhou, a Chinese company incorporated on April 6, 2021. EvoAir Manufacturing wholly owns (f) Evo Air Marketing, a Malaysian company incorporated on February 2, 2021. On June 15, 2022, the Company filed a Certificate of Amendment (the “Amendment”) to the Articles of Incorporation with Nevada’s Secretary of State to change the name of the Company from Unex Holdings Inc. to EvoAir Holdings Inc. (the “Name Change”), and the Name Change became market effective on November 4, 2022. Effective on November 11, 2022, the Company’s shares began trading under the new ticker symbol “EVOH”. 17 | Page Results of Operations The following summary of our operations should be read in conjunction with our unaudited condensed consolidated financial statements for the three months ended November 30, 2022, as compared to the three months ended November 30, 2021. Three Months Ended November 30, 2022, versus Three Months Ended November 30, 2021 Three Months Ended November 30, 2022 2021 Changes % Revenue $ 142,685 $ 808,879 $ (666,194 ) (82 )% Cost of revenue 162,858 707,414 (544,556 ) (77 )% Gross (loss)/profit (20,173 ) 101,465 (121,638 ) (120 )% Operating expenses 1,426,947 510,057 916,890 180 % Loss from operation (1,447,120 ) (408,592 ) (1,038,528 ) 254 % Other income 6,977 25,260 (18,283 ) (72 )% Net Loss $ (1,440,143 ) $ (383,332 ) (1,056,811 ) 276 % The Company generated revenues of $142,685 in the three months ended November 30, 2022, as compared to $808,879 in the three months ended November 30 2021, a decrease in revenue of $666,194. The decline in revenue for the comparative figures is mainly due to the decrease in sales in air purifier products as a result of rollbacking of preventative measures taken by businesses and public from spreading infection as the World and society progresses towards living with Covid-19. The Company is building up its traction for the evoair TM hybrid air-conditioners in 3 months ended November 2022. Cost of revenue was $162,858 or 114% of revenue for the three months ended November 30, 2022, as compared to $707,414 or 87% of revenue in the same financial period in 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. The higher cost of revenue than revenue in the 3 months ended November 30, 2022 is attributable to the lack of economies of scale and the Company has yet to achieve optimal production efficiency. Gross loss was $20,173 or negative gross profit margin of 14% for the three months ended November 30, 2022, as compared to gross profit of $101,465 in the same financial period in 2021 or 13% of revenue. The decrease of gross profit is mainly due to the Company commercialized evoair TM products with higher cost of revenue from manufacturing and related costs as well as lack of economy of scale during commercialization stage. The Company anticipates improvement of income and gross profit margin with the improvement of revenue streams from distributor and dealership model, projects as well as licensing model. Operating expenses were $1,426,947 for the three months ended November 30, 2022, compared to $510,057 in the corresponding period in 2021, an increase of $916,890. The increases in operating expenses were mainly due to the commencement of amortization of intangible assets starting from December 2021. The net loss for the three months ended November 30, 2022, was $1,440,143 as compared to $383,332 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. Liquidity and Capital Resources Working Capital As of As of November 30, August 31, 2022 2022 Changes % Current Assets $ 1,429,997 $ 1,688,926 $ (258,929 ) (15 )% Current Liabilities 727,014 892,004 (164,990 ) (18 )% Working Capital 702,983 796,922 (93,939 ) (12 )% As at November 30, 2022, our company’s current liabilities stood at $727,014, which included accounts payable and accruals of $134,784, other payables of $21,311, current portion hire purchase creditor $7,856, amount due to shareholders $2,301, current portion operating lease liabilities of $127,220, and the deferred revenue of $433,542. As at November 30, 2022 our company had a positive working capital of $702,983 compared with the positive working capital of $796,922 as at August 31, 2022. 18 | Page Cash Flows November 30, November 30, 2022 2021 Changes % Cash flows used in operating activities $ (264,216 ) $ (159,933 ) (104,283 ) 65 % Cash flows used in investing activity (1,044 ) (507,545 ) 506,501 (100 )% Cash flows generated from financing activities 297,089 2,809 294,280 10,476 % Net changes in cash 31,829 (664,669 ) 696,669 (105 )% The Company’s cash and cash equivalents stood at $166,226 as of November 30, 2022. Cash used in operating activities for the three months ended November 30, 2022, was $264,216. This resulted primarily from a net loss of $1,440,362 which was offset by depreciation of $35,126, amortization of $1,065,646, decrease in operating lease $25,232, decrease in inventories of $71,438, decrease in deposit, prepayment and other receivables of $183,110, decrease in accounts receivable of $18,303, decrease in accounts payable and accruals of $82,046, and decrease in other payable of $10,669. Cash used in investing activities resulted from purchase of property plant and equipment amounting to $1,044 for the three months ended November 30, 2022. Cash generated from financing activities resulted from the proceeds from capital raising amounting to $299,055, proceeds from capital contribution amounting to $100, and payments of hire purchase amounting to $2,066 during the three months ended November 30, 2022. Seasonality The Company’s business is not subject to seasonality. Off-Balance Sheet Arrangements As of the date of this Quarterly Report on Form 10-Q, 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, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. 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 revenue 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. 19 | Page 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 2023 and 2022 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. 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 November 30, 2022, and August 31, 2021, the Company had an accumulated deficit of $8,838,700 and $7,465,373 respectively. The Company incurred net loss of $1,440,362 and $383,332 for three months ended November 30, 2022, and November 30, 2021, respectively. The cash used in operating activities were $264,216 and $159,933 for the three months ended November 30, 2022, and November 30, 2021, respectively. 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 a New Business contemplated under the Transaction, 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), 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 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 November 30, 2022. 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 ASC is the sole source of authoritative 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 June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 adds the CECL impairment model to U.S. GAAP that is based on expected losses rather than incurred losses. Modified retrospective adoption is required with any cumulative-effect adjustment recorded to retained earnings as of the beginning of the period of adoption. ASU 2016-13 is effective for fiscal years beginning after December 15, 2022, including interim periods within the year of adoption. Early adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company does not expect the application of the CECL impairment model to have a significant impact on its allowance for uncollectible amounts for accounts receivable. 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. The Company has implemented all new applicable accounting pronouncements that are in effect. These pronouncements did not have any material impact on the financial statements unless otherwise disclosed, and the Company does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations. 20 | Page ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide information required by this Item.