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” 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, 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. 20 | Page 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”. 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 six months ended February 29, 2024, as compared to the three and six months ended February 28, 2023. Three Months Ended February 29, 2024, versus Three Months Ended February 28, 2023 Three Months Ended February 29, 2024 February 28, 2023 Changes % Revenue $ 41,174 $ 70,912 $ (29,738 ) (42 )% Cost of revenue 87,075 88,940 (1,865 ) (2 )% Gross loss (45,901 ) (18,028 ) (27,873 ) (155 )% Operating expenses 1,473,759 1,426,781 46,978 3 % Loss from operation (1,519,660 ) (1,444,809 ) (74,851 ) 5 % Other income 88,902 7,512 81,390 1,083 % Loss from operation before income taxes $ (1,430,758 ) $ (1,437,297 ) 6,530 0.5 % The Company generated revenues of $41,174 in the three months ended February 29, 2024, as compared to $70,912 in the three months ended February 28, 2023, a decrease in revenue of $29,738. Being first mover in launching EvoAir TM , first-of-its-kind eco-friendly air-conditioner with granted patent or utility model/ patent or utility model pending HECS system proprietary system, the Group faced both opportunities and challenges. In the course of applying for some of the certifications, safety and performance testing, the relevant authorities/ organizations faced the challenges in assigning our products in the appropriate category under conventional air-conditioner regime. There are instances whereby some of these authorities/ organizations do not possess the relevant equipment to conduct testings. It took a lot of education, discussions, deliberations and working with the authorities/ organizations to work out solutions to resolve compliance and testing matters. On the positive note, one of the authorities advised us to apply under a new category, ‘Hybrid Air Conditioner. The duration of the application processes were longer than that of typical certifications and testing for conventional air-conditioners. Being a first mover, notwithstanding many of our corporate clients who were impressed and showed keen interest in our products, EvoAir TM , many of them took a few months to conduct study on their own accord on performance and the energy savings of our products. The Company is building up its traction for the EvoAir TM hybrid air-conditioners for both residentials and commercial/ industrial units through distribution channels, projects, building and businesses as well as private labelling and licensing model. During the financial period, EvoAir Manufacturing entered into an OEM supply agreement (the “OEM Agreement”) with Tadmonsori Holdings Sdn Bhd (“THSB”) pursuant to which the parties have agreed for THSB to purchase certain products (the “Products”) from EvoAir Manufacturing to resell directly under THSB’s branding, trademark, graphics, packaging designs and artwork, with the insertion of the words “Powered by EvoAir” inserted at the back of each Product, to THSB end user customers. The OEM Agreement will be renewable on a three-year basis, and upon the execution of the Agreement, THSB shall have made a minimum order of 3,000 units of the Products upon signing of the OEM Agreement, and to target a total sales turnover of 105,000,000 Malaysia Ringgit (approximately US$22,522,522, as calculated at the Foreign Exchange Rate of US$1 = 4.6620 Malaysia Ringgit on December 8, 2023, as published in H.10 statistical release of the United States Federal Reserve Board) over 3 years from January 1, 2024 to December 31, 2026. Cost of revenue was $87,075 or 211% of revenue for the three months ended February 29, 2024, as compared to $88,940 or 125% of revenue in the same financial period in 2023. The slight decline in cost of revenue is due to the lack of economy of scale for the production. Cost of revenues includes production costs and purchases of goods. Gross loss was $45,901 or negative gross profit margin of 111% for the three months ended February 29, 2024, as compared to gross loss of $18,028 in the same financial period in 2023 or 25% of revenue. The increase in gross loss is mainly due to the Company commercializing 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 $1,473,759 for the three months ended February 29, 2024, compared to $1,426,781 in the corresponding period in 2023, an increase of $46,978. The increase in operating expenses was not significant as it’s within 5%. Other income was $88,902 for the three months ended February 29, 2024, compared to $7,512 in the corresponding period in 2023, an increase of $81,390. The change was mainly due to $82,389 realized foreign exchange gain from amounts due to shareholders. The loss from operation before income taxes for the three months ended February 29, 2024, was $1,430,758 as compared to $1,437,297 for the corresponding period in 2023. 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. 21 | Page Six Months Ended February 29, 2024, versus Six Months Ended February 28, 2023 Six Months Ended February 29, 2024 February 28, 2023 Changes % Revenue $ 132,492 $ 213,597 $ (81,105 ) (38 )% Cost of revenue 187,401 251,798 (64,397 ) (26 )% Gross loss (54,909 ) (38,201 ) (16,708 ) (44 )% Operating expenses 2,990,751 2,853,728 137,023 5 % Loss from operation (3,045,660 ) (2,891,929 ) (153,731 ) (5 )% Other income 90,581 14,489 76,092 525 % Loss from operation before income taxes $ (2,955,079 ) $ (2,877,440 ) (77,639 ) (3 )% The Company generated revenues of $132,492 in the six months ended February 29, 2024, as compared to $213,597 in the six months ended February 28, 2023, a decrease in revenue of $81,105. Being first mover in launching EvoAir TM , first-of-its-kind eco-friendly air-conditioner with granted patent or utility model/ patent or utility model pending HECS system proprietary system, the Group faced both opportunities and challenges. In the course of applying for some of the certifications, safety and performance testing, the relevant authorities/ organizations faced the challenges in assigning our products in the appropriate category under conventional air-conditioner regime. There are instances whereby some of these authorities/ organizations do not possess the relevant equipment to conduct testings. It took a lot of education, discussions, deliberations and working with the authorities/ organizations to work out solutions to resolve compliance and testing matters. On the positive note, one of the authorities advised us to apply under a new category, ‘Hybrid Air Conditioner. The duration of the application processes were longer than that of typical certifications and testing for conventional air-conditioners. Being a first mover, notwithstanding many of our corporate clients who were impressed and showed keen interest in our products, EvoAir TM , many of them took a few months to conduct study on their own accord on performance and the energy savings of our products. The Company is building up its traction for the EvoAir TM hybrid air-conditioners for both residentials and commercial/ industrial units through distribution channels, projects, building and businesses as well as private labelling and licensing model. During the financial period, EvoAir Manufacturing entered into an OEM supply agreement (the “OEM Agreement”) with Tadmonsori Holdings Sdn Bhd (“THSB”) pursuant to which the parties have agreed for THSB to purchase certain products (the “Products”) from EvoAir Manufacturing to resell directly under THSB’s branding, trademark, graphics, packaging designs and artwork, with the insertion of the words “Powered by EvoAir” inserted at the back of each Product, to THSB end user customers. The OEM Agreement will be renewable on a three-year basis, and upon the execution of the Agreement, THSB shall have made a minimum order of 3,000 units of the Products upon signing of the OEM Agreement, and to target a total sales turnover of 105,000,000 Malaysia Ringgit (approximately US$22,522,522, as calculated at the Foreign Exchange Rate of US$1 = 4.6620 Malaysia Ringgit on December 8, 2023, as published in H.10 statistical release of the United States Federal Reserve Board) over 3 years from January 1, 2024 to December 31, 2026. Cost of revenue was $187,401 or 141% of revenue for the six months ended February 29, 2024, as compared to $251,798 or 118% of revenue in the same financial period in 2023. The decline in cost of revenue for the comparative figures is in line with the drop in sales. Cost of revenues includes production costs and purchases of goods. Gross loss was $54,909 or negative gross profit margin of 41% for the six months ended February 29, 2024, as compared to gross loss of $38,201 in the same financial period in 2023 or 18% of revenue. The increase of gross loss 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 $2,990,751 for the six months ended February 29, 2024, compared to $2,853,728 in the corresponding period in 2023, an increase of $137,023. The increase in operating expenses was not significant as it’s within 5%. Other income was $90,581 for the six months ended February 29, 2024, compared to $14,489 in the corresponding period in 2023, an increase of $76,092. The change was mainly due to $82,389 realized foreign exchange gain from amounts due to shareholders. The loss from operation before income taxes for the six months ended February 29, 2024, was $2,955,079 as compared to $2,877,440 for the corresponding period in 2023. 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. 22 | Page Liquidity and Capital Resources Working Capital As of As of February 29 , 2024 August 31, 2023 Changes % Current assets $ 1,394,439 $ 2,071,164 $ (676,725 ) (33 )% Current liabilities 1,215,947 964,642 2 51 ,3 05 26 % Working capital 178,492 1,106,522 (928,030 ) (84 )% As at February 29, 2024, our company’s current liabilities stood at $1,394,439, which included accounts payable and accruals of $252,741, other payables of $27,439, current portion hire purchase creditor $7,412, amounts due to shareholders $439,630, current portion operating lease liabilities of $88,952 and the deferred revenue of $399,773. As at February 29, 2024 our company had a positive working capital of $178,492 compared with the positive working capital of $1,106,522 as at August 31, 2023. The drop in working capital for the comparative figures was mainly attributable to the decrease in cash proceeds from issuance of common stock or capital contribution, decrease in deposits, prepayments and other receivables, increase in accounts payable and accruals, and the increase in amounts due to shareholders. Cash Flows Six Months Ended February 29, 2024, versus Six Months Ended February 28, 2023 February 29, February 28, 2024 2023 Changes % Cash flows used in operating activities $ (457,609 ) $ (326,333 ) (131,276 ) (40 )% Cash flows used in investing activity (96,186 ) (11,754 ) (84,432 ) (718 )% Cash flows (used in) generated from financing activities (4,144 ) 439,233 (443,377 ) (101 )% Net changes in cash (557,939 ) 101,146 (659,085 ) (652 )% The Company’s cash and cash equivalents stood at $137,029 as of February 29, 2024. Cash used in operating activities for the six months ended February 29, 2024, was $457,609. This resulted primarily from a net loss of $2,955,079 which was offset by depreciation of $137,106, amortization of $2,078,694, decrease in operating lease right-of-use assets of $41,049, decrease in operating leases liabilities of $43,128, increase in inventories of $94,838, decrease in deferred revenue of $40,296, decrease in deposit, prepayment and other receivables of $128,099, decrease in accounts receivable of $1,444, increase in accounts payable and accruals of $81,853, increase in amounts due to shareholders of $207,535, and decrease in other payables of $48. Cash used in investing activity resulted from purchase of property plant and equipment amounting to $96,186 for the six months ended February 29, 2024. Cash used in financing activities resulted from the payments of hire purchase amounting to $4,144 during the six months ended February 29, 2024. 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. 23 | Page 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. 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 2024 and 2023 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. 24 | Page Going Concern As of February 29, 2024, and August 31, 2023, the Company had an accumulated deficit of $16,334,493 and $13,523,266 respectively. The Company incurred net loss of $2,955,079 and $ $2,877,440 for the six months ended February 29, 2024, and February 28, 2023, respectively. The cash used in operating activities was $457,609 and $326,333 for the six months ended February 29, 2024, and February 28, 2023, 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 development of HVAC business (“HVAC Business”) pursuant to 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 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 in conjunction with the Company’s plan to uplist on Nasdaq Capital Market/ NYSE American LLC 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 February 29, 2024. 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 August 2020, the FASB issued ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40). This ASU reduces the number of accounting models for convertible debt instruments and convertible preferred stock and amends the guidance for the derivatives scope exception for contracts in an entity’s own equity to reduce form-over-substance-based accounting conclusions. In addition, this ASU improves and amends the related earnings per share guidance. This standard becomes effective for the Company beginning on October 1, 2024. Adoption is either a modified retrospective method or a fully retrospective method of transition. The Company adopted this guidance effective September 1, 2023, and the adoption of this standard did not have a material impact on its consolidated financial statements. In November 2023, the FASB issued ASU 2023-07, Improvement to Reportable Segment Disclosures. This ASU aims to improve segment disclosures through enhanced disclosures about significant segment expenses. The standard requires disclosure of significant expense categories and amounts for such expenses, including those segment expenses that are regularly provided to the chief operating decision maker, easily computable from information that is regularly provided, or significant expenses that are expressed in a form other than actual amounts. This standard will be effective for the Company in Fiscal Year 2025 and is required to be applied retrospectively to all prior periods presented in the financial statements. The Company is currently evaluating the impact of the additional disclosure requirements on the Company’s condensed consolidated financial statements. In December 2023, the FASB issued ASU 2023-09, Improvements to Income Tax Disclosures, a final standard on improvements to income tax disclosures which applies to all entities subject to income taxes. The standard requires disaggregated information about a reporting entity’s effective tax rate reconciliation as well as information on income taxes paid. The standard is intended to benefit investors by providing more detailed income tax disclosures that would be useful in making capital allocation decisions. This standard will be effective for the Company in Fiscal Year 2026 and should be applied prospectively. The Company is currently evaluating the impact of the additional disclosure requirements on the Company’s condensed consolidated financial statements. Other recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company’s present or future financial statements. 25 | 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.