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 U.S., 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 US$ and all references to “common shares” or “common stock” 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 (formerly Unex Holdings Inc.) (the “Company”, “EVOH”, “we”, “us”, or “our”) is a corporation established under the corporation laws in the State of Nevada, U.S. 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 contemplated under Note 1 to Financial Statements, is engaged in the R&D, manufacturing, trading, sale of HVAC products and related services 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”. 18 | 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 and nine months ended May 31, 2023, as compared to the three and nine months ended May 31, 2022. Three Months Ended May 31, 2023, versus Three Months Ended May 31, 2022 Three Months Ended May 31, 2023 2022 Changes % Revenue $ 165,726 $ 194,954 $ (29,228 ) (15 )% Cost of revenue 124,647 173,842 (49,195 ) (28 )% Gross profit 41,079 21,112 19,967 95 % Operating expenses 1,468,153 1,440,623 27,530 2 % Loss from operation (1,427,074 ) (1,419,511 ) 7,563 1 % Other expenses (86,349 ) (9,845 ) 76,504 777 % Loss from operation before income taxes $ (1,513,423 ) $ (1,429,356 ) 84,067 6 % The Company generated revenues of $165,726 in the three months ended May 31, 2023, as compared to $194,954 in the three months ended May 31 2022, a decrease in revenue of $29,228. The decline in revenue is mainly due to the decrease in sales in air purifier products as a result of rollback of preventative measures taken by businesses and public from spreading infection as the World. The Company is building up its traction for the evoair TM hybrid air-conditioners for both residentials and industrial units. Cost of revenue was $124,647 or 75% of revenue for the three months ended May 31, 2023, as compared to $173,842 or 89% of revenue in the same financial period in 2022. The decline in cost of revenue is in line with the decrease in sales for the air purifier products. Cost of revenues includes production costs and purchases of goods. Gross profit was $41,079 or gross profit margin of 25% for the three months ended May 31, 2023, as compared to gross profit of $21,112 in the same financial period in 2022 or 11% of revenue. The increase in gross profit margin was attributable to the sales of new products, which contributed to a higher gross profit margin. 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 private labeling and licensing model. Operating expenses were $1,468,153 for the three months ended May 31, 2023, compared to $1,440,623 in the corresponding period in 2022, an increase of $27,530. The change in operating expenses was not significant. The loss from operation before income taxes for the three months ended May 31, 2023 was $1,513,423 as compared to $1,429,356 for the corresponding period in 2022. 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 Ended May 31, 2023, versus Nine Months Ended May 31, 2022 Nine Months Ended May 31, 2023 2022 Changes % Revenue $ 379,323 $ 1,306,717 $ (927,394 ) (71 )% Cost of revenue 376,445 1,075,841 (699,396 ) (65 )% Gross profit 2,878 230,876 (227,998 ) (99 )% Operating expenses (4,321,881 ) (3,253,759 ) 1,068,122 33 % Loss from operation (4,319,003 ) (3,022,883 ) 1,296,120 43 % Other expense (71,860 ) (978,203 ) (906,343 ) (93 )% Loss from operation before income taxes $ (4,390,863 ) $ (4,001,086 ) 389,777 10 % 19 | Page The Company generated revenues of $379,323 in the nine months ended May 31, 2023, as compared to $1,306,717 in the nine months ended May 31, 2022, a decrease in revenue of $927,394. The drop in revenue is mainly due to the decrease in sales in air purifier products as a result of rollback 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 for both residentials and industrial units. Cost of revenue was $376,445 or 99% of revenue for the nine months ended May 31, 2023 as compared to $1,075,841 or 82% of revenue in the same financial period in 2022. The decline in cost of revenue is in line with the drop in sales for the air purifier products. Cost of revenues includes production costs and purchases of goods. Gross profit was $2,878 or gross profit margin of 1% for the nine months ended May 31, 2023 as compared to gross profit of $230,876 in the same financial period in 2022 or 18% of revenue. The decline in gross profit margin was attributable to the drop in sales of air purifier products, of which the product range contributed higher gross profit margin. Besides, 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 private labeling and licensing model. Operating expenses were $4,321,881 for the nine months ended May 31, 2023 compared to $3,253,759 in the corresponding period in 2022, an increase of $1,068,122. The increase in operating expenses were mainly due to the commencement of amortization of intangible assets starting from January 2022. The loss from operation before income taxes for the nine months ended May 31, 2023 was $4,390,863 as compared to $4,001,086 for the corresponding period in 2022. 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 May 31, As of August 31, 2023 2022 Changes % Current assets $ 1,818,810 $ 1,688,926 $ 129,884 8 % Current liabilities 994,489 892,004 102,485 11 % Working capital 824,321 796,922 27,399 3 % As at 31 May, 2023, increase of current assets mainly due to additional cash received from the capital raising activities for the 9 months period ended May 31, 2023. As at May 31, 2023, increase in current liabilities mainly due to loan from shareholders of $305,425. As at May 31, 2023 our company had a positive working capital of $824,321 compared with the positive working capital of $796,922 as at August 31, 2022. The increase in working capital was mainly attributable to the increase in cash from issuance of common stock and capital contribution. 20 | Page Cash Flows Nine Months Ended May 31, 2023, versus Nine Months Ended May 31, 2022 May 31, May 31, 2023 2022 Changes % Cash flows used in operating activities $ (755,915 ) $ (1,023,037 ) (267,122 ) (26 )% Cash flows used in investing activity (29,473 ) (566,734 ) (537,261 ) (95 )% Cash flows generated from financing activities 1,219,513 185,185 1,034,328 559 % Net changes in cash 434,125 (1,404,586 ) 1,838,711 131 % The Company’s cash and cash equivalents stood at $524,861 as of May 31, 2023. Cash used in operating activities for the nine months ended May 31, 2023, was $755,915. This resulted primarily from a net loss of $4,390,863 which was offset by depreciation of $126,139, amortization of $3,118,041, property, plant and equipment impairment and abandonments of $21,387, decrease in operating lease right-of-use assets of $148,286, decrease in operating leases liabilities of $165,987, decrease in inventories of $25,532, decrease in deferred revenue of $69,922, decrease in deposit, prepayment and other receivables of $205,214, decrease in accounts receivable of $11,928, decrease in accounts payable and accruals of $74,641, increase in amounts due to shareholders of $303,124, and decrease in other payables of $14,152. Cash used in investing activity resulted from purchase of property plant and equipment amounting to $29,473 for the nine months ended May 31, 2023 which is lesser than comparative figure mainly due to most property plant and equipment being acquired during start up period. Cash generated from financing activities resulted from the proceeds from capital raising amounting to $443,498, proceeds from share to be issued amounting to $625,330, proceeds from capital contribution amounting to $157,255 and payments of hire purchase amounting to $6,570 during the nine months ended May 31, 2023. 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. 21 | Page 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 The preparation of financial statements in conformity with U.S. GAAP requires the Management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of sales and expenses during the reporting periods. Key estimates in the accompanying unaudited condensed consolidated financial statements include, inter-alia , revenue recognition, allowances for doubtful accounts and product returns, provisions for obsolete inventory, valuation of long-lived assets and rights of use (“ROU”) assets (including lease liabilities), and deferred income tax asset valuation allowances. Actual results could differ materially from these estimates. Going Concern As of May 31, 2023 and August 31, 2022, the Company had an accumulated deficit of $11,666,517 and $7,465,373 respectively. The Company incurred net loss of $4,390,863 and $4,001,086 for nine months ended May 31, 2023 and May 31, 2022, respectively. The cash used in operating activities were $755,915 and $1,023,037 for the nine months ended May 31, 2023 and May 31, 2022, 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 HVAC Business contemplated under the Transactions in Note 1 to the Financial Statements, the Management believes that the actions to be taken by the Management to further implement the business plans for the HVAC Business including expansion in product offerings, geographical expansion, generate revenue through expansion of revenue streams and customer base (retail, commercial, industrial, projects 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 May 31, 2023. 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. 22 | Page 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. 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.