Phoenix Motor - 10-Q quarterly report FY2022 Q2

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PART I

Item 1. Interim Financial Statements

Index to Financial Statements

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PHOENIX MOTOR INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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PHOENIX MOTOR INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in US$ thousands, except share and per share data)

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Forward-Looking Statements

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and the related notes included elsewhere in this interim report. Our consolidated financial statements have been prepared in accordance with U.S. GAAP. The following discussion and analysis contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including, without limitation, statements regarding our expectations, beliefs, intentions or future strategies that are signified by the words “expect,” “anticipate,” “intend,” “believe,” or similar language. All forward-looking statements included in this document are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. Our business and financial performance are subject to substantial risks and uncertainties. Actual results could differ materially from those projected in the forward-looking statements. In evaluating our business, you should carefully consider the information set forth under the heading “Risk Factors” in our Form S-1 Registration Statement filed on May 24, 2022. Readers are cautioned not to place undue reliance on these forward-looking statements.

Overview

Phoenix Motor Inc., doing business as “Phoenix Motorcars” through its wholly owned subsidiaries, Phoenix Cars LLC, Phoenix Motorcars Leasing LLC, and EdisonFuture Motor, Inc., currently designs, assembles, and integrates electric drive systems and light and medium duty electric vehicles (“EVs”) and markets and sells electric vehicle chargers for the commercial and residential markets.

The Company operates two primary brands, “Phoenix Motorcars” focused on commercial products including medium duty electric vehicles, chargers and electric forklifts, and “EdisonFuture” which intends to offer light-duty electric vehicles. As an EV pioneer, we delivered our first commercial EV in 2014. We develop and integrate our proprietary electric drivetrain into the Ford Econoline Chassis (E-Series), specifically on the Ford E-450. The Ford E-Series is the dominant chassis in the medium duty Class 4 market in the U.S. in terms of market share and the range of configurations varying from shuttle buses, Type A school buses, utility trucks, service trucks, to flatbed trucks, walk-in vans, and cargo trucks. Since our inception, we have been developing light and medium duty commercial electric vehicles for various service and government fleet markets, including city fleets, campuses, municipalities and transit agencies and serve a broad spectrum of commercial fleet customers, such as airport shuttle operators, hotel chains, transit fleet operators, seaports, last-mile delivery fleets, and large corporations.

Basis of presentation, management estimates and critical accounting policies

Our unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and include the accounts of our company, and all of our subsidiaries. We prepare financial statements in conformity with U.S. GAAP, which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities on the date of the financial statements and the reported amounts of revenues and expenses during the financial reporting period. We continually evaluate these estimates and assumptions based on the most recently available information, our own historical experience and various other assumptions that we believe to be reasonable under the circumstances. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from those estimates. Some of our accounting policies require higher degrees of judgment than others in their application. In order to understand the significant accounting policies that we adopted for the preparation of our condensed consolidated interim financial statements, readers should refer to the information set forth in Note 3 “Summary of significant accounting policies” to our audited financial statements in Form S-1 Registration Statement filed on May 24, 2022.

Principal Factors Affecting Our Results of Operations

We believe that the following factors have had, and we expect that they will continue to have, a significant effect on the development of our business, financial condition and results of operations.

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Public health efforts to mitigate the impact of COVID-19 have included government actions such as travel restrictions, limitations on public gatherings, shelter in place orders, and mandatory closures. These actions are being lifted to varying degrees. However, the associated impact of COVID-19 closures and mobility restrictions on the economy are expected to continue to unfold. Supply chain disruptions, inflation, high energy prices, and supply-demand imbalances are expected to continue in 2022. The Group closely monitors customer accounts and has not experienced significant delays in the collection of accounts receivable.

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The ultimate impact of COVID-19 and the outbreak of war in Ukraine on our business, results of operations, financial condition, and cash flows is dependent on future developments, including the duration of COVID-19 and the crisis in Ukraine, government responses and the related length of this impact on the economy, which are uncertain and cannot be predicted at this time.

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On July 30, 2022, our battery pack supplier Romeo Power, Inc. (“Romeo”) entered into a Merger Agreement (the “Transaction”) to be acquired by Nikola Corporation. (“Nikola”). Subsequently, we were notified by Romeo that they intend

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to stop taking additional purchase orders once they finish fulfilling our current purchase orders, until the Transaction closes. During the three months ended June 30, 2022, Romeo was the only supplier for our battery packs. We are dependent on the continued supply of battery packs by Romeo for the manufacturing of our current generation products and we have limited flexibility in changing battery pack supplier given the design of our current generation products. While we may be able to establish alternative supply relationships and obtain replacement, we may be unable to do so in the short term (or at all) at prices or quality levels that are favorable to us. While we’re actively pursuing a mitigation plan to minimize impacts on our manufacturing process, including modifying the design of our current generation products, accelerating the development of next generation products and negotiating an exception with Nikola and Romeo management, the loss of Romeo as our battery supplier could cause a near-term disruption in our ability to timely deliver certain products, or increase costs, which may have a material adverse effect on our business, financial condition, and operating results.

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Results of Operations

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Net Revenues

For the three months ended June 30, 2022 and 2021, our revenues were $1.5 million and $0.7 million, respectively. Our total revenue increased by $0.8 million, or 129.6%, principally driven by the expanded sale of forklift products during the three months ended June 30, 2022 as compared to the three months ended June 30, 2021. We delivered two EVs during the three months ended June 30, 2022, and two EVs during the three months ended June 30, 2021, respectively.

For the six months ended June 30, 2022 and 2021, our revenues were $2.2 million and $1.1 million, respectively. The 92.7% increase in revenues was primarily driven by the increase in sales of forklifts.

For the three ended June 30, 2022 and 2021 and six months ended June 30, 2022 and 2021, our revenue breakdown by major categories for relevant periods is as follows:

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Cost of Revenues

Cost of revenues for EV sales includes direct parts, material and labor costs, manufacturing overheads, and shipping and logistics costs. Cost of revenues for EV leasing primarily includes the depreciation of operating lease vehicles over the lease term and other leasing related charges including vehicle insurance. Cost of other revenue includes direct parts, material and labor costs, as well as shipping and delivery and other costs.

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For the three months ended June 30, 2022 and 2021, our costs of revenues were $1.2 million and $0.8 million, respectively. Cost of revenues increased by $0.4 million, or 44.6%, primarily driven by costs inclusion of forklift products, partially offset by lower direct costs associated with EVs due to higher efficiency in production during the three months ended June 30, 2022 as compared to the three months ended June 30, 2021.

For the six months ended June 30, 2022 and 2021, our costs of revenues were $1.7 million and $1.2 million, respectively. The 39.9% increase in cost of revenues was primarily driven by the inclusion of forklifts costs.

Gross Margin

Gross profit is defined as revenues minus cost of revenues. Gross margin, stated as a percentage, is defined as gross profit divided by revenues.

For the three months ended June 30, 2022 and 2021, our combined gross margin significantly improved from -24.3% to 21.7%, driven by improved margins across all products categories, particularly attributable to the 19.2% gross margin of forklifts products.

For the six months ended June 30, 2022 and 2021, our combined gross margin significantly improved from -9.5% to 20.5%, driven by improved margins across all products categories, particularly attributable to the 19.2% gross margin of forklifts products.

Operating Expenses

Operating expenses consist of selling, general, administrative expenses.

Our selling, general and administrative expenses which consist primarily of salaries, research and development, professional service fees, rent expense, and office supplies expenses.

For the three months ended June 30, 2022 and 2021, our operating expenses were $2.3 million and $2.1 million, respectively. The increase in operating expenses was mainly due to increases in payroll and expenses associated with becoming a public company.

For the six months ended June 30, 2022 and 2021, our operating expenses were $5.3 million and $4.1 million, respectively. The increase in operating expenses was mainly due to the increase in salaries and wages, professional service fee and insurance expenses.

Other (Expense) Income, net

Other (expense) income, net includes interest expense and other income.

Our other income for the six months ended June 30, 2022, were $0.6 million, primarily due to recognition of a forgiven PPP loan.

Net Loss

As a result of the above factors, the net loss for the three months ended June 30, 2022 and 2021, was $1.9 million and $2.3 million, respectively.

As a result of the above factors, the net loss for the six months ended June 30, 2022 and 2021, was $4.2 million and $4.2 million, respectively.

Recent Accounting Pronouncements

See Note 3 “Summary of Significant Accounting Policies” to our consolidated financial statements in our Form S-1 Registration Statement filed on May 24, 2022 for a description of recently issued or adopted accounting pronouncements that may potentially impact our financial position, results of operations or cash flows.

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Liquidity and Capital Resources

As of June 30, 2022 and December 31, 2021, we had cash and cash equivalents of $7.8 million and $2.7 million, respectively. As of June 30, 2022, we had restricted cash of $0.3 million deposited in an escrow account. We have incurred a net loss of $4.2 million during the six months ended June 30, 2022, and the net cash used in operating activities was $8.4 million. As of June 30, 2022, we had accumulated deficit of $20.1 million.

A summary of the cash flow activities is as follows:

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Operating Activities

Net cash used in operating activities was $8.4 million for the six months ended June 30, 2022, primarily due to a net operating loss of $4.2 million, an increase in prepaid expenses and other assets of $3.2 million, an increase in inventory of $1.6 million, forgiveness of PPP loan of $0.6 million, and a decrease in deferred revenue of $0.2 million, partially offset by an increase in accounts payable of $0.6 million and depreciation and amortization of $0.9 million.

Net cash used in operating activities was $6.2 million for the six months ended June 30, 2021, primarily due to a net operating loss of $4.2 million, an increase in prepaid expenses $2.5 million, and an increase in inventories of $0.3 million, partially offset by an increase in accounts payable of $0.2 million, and depreciation and amortization of $0.9 million.

Investing Activities

Net cash generated from investing activities was $0.3 million for six months ended June 30, 2022, primarily as a result of disposal of fixed assets.

Net cash used in investing activities was $0.5 million for six months ended June 30, 2021, primarily as a result of capital expenditure.

Financing Activities

Net cash generated from financing activities was $13.4 million for the six months ended June 30, 2022, primarily as a result of net IPO proceeds.

Net cash generated from financing activities was $0.6 million for six months ended June 30, 2021, primarily as a result of net proceeds received from PPP loan.

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Capital Expenditures

We incurred capital expenditures of $0.01 million and $0.5 million for the six months ended June 30, 2022 and 2021, respectively. These capital commitments were mainly related to a contract signed for show car model development. We expect to finance the projects using cash from our operations, proceeds from equity offerings, bank borrowings as well as other third-party financing options.

Backlog

As of August 15, 2022, our backlog of approximately 88 orders consists of 44 vehicles and 44 electric drive system kits. The order backlog represents $14.3 million of revenue, consisting of $9.1 million for vehicles and $5.2 million for electric drive systems. Additionally, Phoenix has binding orders for 36 chargers representing over $0.9 million in revenue.

Our order backlog is generally comprised of non-binding agreements and purchase orders from customers. In addition, some of our order backlog has contingencies, including completing a successful pilot program, obtaining third-party financing or obtaining government grants, such as the California Hybrid and Zero-Emission Truck and Bus Voucher Incentive Project. Although the order backlog, in most cases, does not constitute a legal obligation and, in some cases, may have contingencies, we believe the amounts included in our order backlog are firm, even though the non-binding orders may be cancelled or delayed by customers without penalty. We may elect to permit cancellation of orders without penalty where management believes it is in our best interest to do so. On a case-by-case basis and at our sole discretion, we have held partial deposits for purchase orders from customers.

The realization and timing of the recognition of our order backlog is dependent, among other things, on our ability to obtain and secure a steady supply of components used in our current manufacturing process, as well as customers’ continued acceptance of our new products as we develop and transition to future generation product offerings. Accordingly, revenue estimates and the amount and timing of work expected to be performed at the time the estimate of order backlog is developed is subject to change. As a result, the order backlog may not be indicative of future sales and can vary significantly from period to period. In addition, it is possible that the methodology for determining the order backlog may not be comparable to methods used by other companies.

Trend information

Our operating results substantially depend on revenues derived from sales and leasing of EVs. As the COVID-19 spread continues, the measures implemented to curb the spread of the virus have resulted in supply chain disruptions, insufficient work force and suspended manufacturing for EV industry. In light of the rapidly changing situation across different countries and regions, it remains difficult to estimate the duration and magnitude of COVID-19 impact.

Other than as disclosed elsewhere in this quarterly report, we are not aware of any trends, uncertainties, demands, commitments or events for the six months ended June 30, 2022 that are reasonably likely to have a material effect on our net revenues, income, profitability, liquidity or capital resources, or that would cause reported consolidated financial information not necessarily to be indicative of future operating results or financial conditions.

Off-Balance Sheet Arrangements

As of June 30, 2022, we had no off-balance sheet arrangements that are or have been 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. We have not entered into any derivative contracts that are indexed to our own shares and classified as shareholder’s equity, or that are not reflected in our unaudited condensed consolidated financial statements. We do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.

For more information on our contractual obligations, commitments and contingencies, see Note 9 to the unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report Form 10-Q.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

Not applicable to smaller reporting companies.

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Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our principal executive officer and principal financial and accounting officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the fiscal quarters ended June 30, 2022, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on this evaluation, our principal executive officer and principal financial and accounting officer have concluded that during the period covered by this report, our disclosure controls and procedures were not effective as of such date to ensure that information required to be disclosed by us in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial and accounting officer or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

In connection with the audit of our consolidated financial statements for the year ended December 31, 2021, we identified following material weaknesses, in the design or operation of internal controls.

We intend to implement measures designed to improve the Company’s internal control over financial reporting to address the underlying causes of these material weaknesses, including (1) hiring more qualified staff and increasing resources with sufficient knowledge and experience to strengthen financial reporting; (2) setting up a financial and system control framework to ensure proper segregation of duty and review procedures, with formal documentation of polices and controls in place; (3) forming a task force to design and improve processes and controls to monitor operations and record financial data; and (4) devoting proper time by senior management to perform comprehensive review of procedures to assess risks and enforce effective accountability.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting that occurred during the fiscal quarters of 2022 covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II - OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, we are involved in various legal proceedings arising in the normal course of business. While we cannot predict the occurrence or outcome of these proceedings with certainty, we do not believe that an adverse result in any pending legal proceeding, individually or in the aggregate, would be material to our financial condition.