PEV Phoenix Motor Inc

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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FORM 10-Q

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(Mark One)

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For the quarterly period ended March 31, 2023

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OR

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For the transition period from ________ to__________

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Commission file number: 333-261384

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Phoenix Motor Inc.

(Exact Name of Registrant as Specified in Its Charter)

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(909) 978-0815

(Registrant’s Telephone Number, Including Area Code)

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(Former name or former address, if changed since last report)

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Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

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Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

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The registrant had 21,291,924 shares of common stock outstanding at May 15, 2023.

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

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

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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.

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The Group recognizes revenue on sales of EVs and kits at a point in time following the transfer of control of such products to the customer, which typically occurs upon the delivery to the customer. The Group determined that the government grants should be considered as part of the transaction price because it is granted to the EV buyer and the buyer remains liable for such amount in the event the grants were not received by the Group or returned due to the buyer violates the government grant terms and conditions.

Lease of EVs

EV leasing revenue includes revenue recognized under lease accounting guidance for direct leasing programs. The Group accounts for these leasing transactions as sales-type or operating leases under ASC 842 Leases, and selling profits are recognized at the commencement date and interest income from the lease is recognized over the lease term for sales-type leases, while revenues are recognized on a straight-line basis over the contractual term for operating leases.

Sales of forklifts

Revenue on sale of forklifts is recognized at a point in time following the transfer of control of such products to the customer, which typically occurs upon delivery or acceptance of the customer depending on the terms of the underlying contracts.

Other revenue

Other revenue consists of maintenance service, sales of component and charging stations, shipping and delivery fees and others. For maintenance service, revenues are recognized on a straight-line basis over the contractual term. For sales of component and charging stations, shipping and delivery fees and others, the Group recognizes revenue at a point in time following the transfer of control of such products or services to the customer, which typically occurs upon the delivery to the customer.

Disaggregation of revenues

The Group disaggregates its revenue by four primary categories: sales of EVs, lease of EVs, sales of forklifts and others.

The following is a summary of the Group’s disaggregated revenues:

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A contract liability is the Group’s obligation to transfer goods or services to a customer for which the Group has received consideration (or an amount of consideration is due) from the customer. The Group records contract liabilities as advance from customers. As of March 31, 2023 and December 31, 2022, the balances of contract liabilities were $1,452 and $1,230, respectively.

(c)Leases

Lessor Accounting

During the three months ended March 31, 2023, the Group amended agreements with the customers related to the leased EVs to renew the lease term. Since there was no grant of additional right-of-use assets, the Group did not account for the modified lease agreements as new leases but accounted for the original lease and the modified lease agreements as a combined lease. The Group reviewed the combined lease agreements and considered that (i) the lease term represents for the major part (greater than 75%) of the economic life of the underlying equipment; and (ii) the present value of the sum of lease payments and any residual value guaranteed by the lessee that has not already been included in lease payments equals or exceeds substantially (greater than 90%) all of the fair value of the underlying asset.

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The modified EV lease agreements are thus accounted for as sales-type leases. Under sales-type lease accounting, at the commencement date, the lessor recognizes a net investment in the lease, based on the estimated fair value of the underlying leased assets at contract inception, and derecognizes the underlying assets with the difference recorded as selling profit or loss arising from the lease, and interest income from the lease is recognized over the lease term.

The net investment in leases was $295 as of March 31, 2023. During the three months ended March 31, 2023, gain on sales-type leases was $99.

Annual minimum undiscounted lease payments under the Group’s sales-type leases were as follows as of March 31, 2023:

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(1) Current portion of $78 of total lease receivables was included in prepaid and other current assets on the balance sheet.

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3.Going Concern

The Group had recurring losses from operations. The Group has incurred a net loss of $2,778 during the three months ended March 31, 2023, and the cash flow used in operating activities was $1,086. The Group has incurred significant losses and negative cash flow from operating activities and needs to raise additional funds to sustain its operations. These factors raise substantial doubt as to the Group's ability to continue as a going concern.

For the next 12 months from the issuance date of the condensed consolidated quarterly financial statements, the Group plans to continue implementing various measures to boost revenue and control the cost and expenses within an acceptable level. Such measures include: 1) align capacity with demand and prioritize production for high margin products in the Group's order backlog; 2) expand and strengthen strategic partnership to outsource a significant portion of design and engineering work for next generation product to third party vendors and suppliers to control overall development costs; 3) negotiate better payment terms with customers and for some of the new orders, require down payments; 4) implement comprehensive budget control and reduce operating expenses; and 5) calibrate capital allocation to manage liquidity and drive near-term goals without compromising long-term growth; 6) continue to proactively implement a robust capital market strategy to provide financing for the Group’s operations through proceeds from public or private stock offering, debt financings including but not limited to term loans, revolving line of credit and equity linked instruments, and potentially federal and state incentive funding programs.

There is no assurance that the plans will be successfully implemented. If the Group fails to achieve these goals, the Group may need additional financing to repay debt obligations and execute its business plan, and the Group may not be able to obtain the necessary additional capital on a timely basis, on acceptable terms, or at all. In the event that financing sources are not available, or that the Group is unsuccessful in increasing its gross profit margin and reducing operating losses, the Group may be unable to implement its current plans for expansion, repay debt obligations or respond to competitive pressures, any of which would have a material adverse effect on the Group's business, financial condition and results of operations and may materially adversely affect its ability to continue as a going concern.

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The unaudited condensed consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded assets or the amounts and classification of liabilities or any other adjustments that might be necessary should the Group be unable to continue as a going concern.

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4.Accounts Receivable, Net

The accounts receivable, net as of March 31, 2023 and December 31, 2022 consisted of the following:

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For the three months ended March 31, 2023, the Group reversed bad debt provision of $25. There was no bad debt provision recorded for the three months ended March 31, 2022.

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5.Inventories

Inventories as of March 31, 2023 and December 31, 2022 consisted of the following:

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During the three months ended March 31, 2023, $80 of inventories were written down to reflect the lower of cost or net realizable value. During the three months ended March 31, 2022, no inventories were written down to reflect the lower of cost or net realizable value.

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6.Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets as of March 31, 2023 and December 31, 2022 consist of the following:

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Prepaid expenses as of March 31, 2023 consisted of $941 prepayment for research and development.

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7.Equity

(a)Shares of common stock

On March 8, 2022, a shareholder meeting was held and declared a one-for-four reverse stock split effective on March 9, 2022. After that, the Company’s issued and outstanding common stock is 17,500,000 shares. The authorized shares of common stock after the reverse stock splits are 450,000,000 shares of a par value of $0.0004.

As a result of the amendment of authorized stock, the stock split and reverse of stock split, all share and per share data in the condensed consolidated financial statements have been retrospectively adjusted to all periods presented.

On November 22, 2022, the Group entered into a Standby Equity Purchase Agreement (“SEPA”) with YA II PN, LTD., a Cayman Islands exempt limited partnership (the “Investor”) to sell up to $10,000 of the Company’s shares of common stock from time to time, subject to certain limitations and conditions set forth in the SEPA. Although the SEPA provides that the Company may sell up to an aggregate of $10,000 of common stock to Investor, only 4,035,086 shares of the Company’s common stock, including the aggregate amount of 61,421 Commitment Shares issued to Investor, have been registered. If the Company elect to sell to the Investor all of the 4,035,086 registered shares of common stock, depending on the market price of the Company’s common stock prior to each draw-down made pursuant to the SEPA, the actual gross proceeds from the sale of all such shares may be substantially less than the $10,000 available to the Company, which could materially adversely affect the Company’s liquidity. The selling price is 93% of the market price as defined in the agreement. The Group paid YA Global II SPV, LLC, a subsidiary of the Investor, a structuring fee in the amount of $20 and also issued to the Investor common shares in an amount equal to $100 as a commitment fee. On December 21, 2022, the Group elected to draw down under the SEPA and sold to the Investor 30,000 shares of common stock, resulting in the receipt of $30 in net proceeds from the sale. During the three months ended March 31, 2023, the Group continued to draw down amounts under the SEPA, which resulted in the sale to the Investor 904,878 shares of common stock and  the receipt of $1,154 in net proceeds from the sale.

(b)Additional paid-in capital

The Company recorded an increase to additional paid in capital of $109 and $63 for the share-based compensation expense in the three months ended March 31, 2023 and 2022, respectively. In addition, the Company also recorded an increase of $1,154 to additional paid in capital due to 904,878 shares issued and sold for the SEPA in the three months ended March 31, 2023.

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8.Stock-based Compensation

During the three months ended March 31, 2023 and 2022, the stock-based compensation expense was $109 and $63, respectively.

There were no changes to the contractual life of any fully vested options during the three months ended March 31, 2023 and 2022. As of March 31, 2023, unrecognized share-based compensation expenses related to the share options granted were $1,402. The expenses are expected to be recognized over a weighted-average period of 2.69 years.

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9.Related Party Transactions

During the three months ended March 31, 2023, the Group made a loan of $400 to its ultimate parent company, SPI Energy Co., Ltd. (“SPI”). The loan is due on demand and bears no interest. The loan was paid off by SPI by the end of March 31, 2023.

During the three months ended March 31, 2022, the Group paid $84 withholding payroll taxes on behalf of SPI and SPI lent a loan with principal amount of $78 to the Group to support the Group’s business. The loan is due on demand and bears no interest.

As of March 31, 2023 and December 31, 2022, the amount due from a related party is $168 and $168, respectively.

10.Commitments and Contingencies

Commitments — As of March 31, 2023, the Group had other commitments of approximately $1,596. These commitments were solely related to contracts signed with vendors for research and development by the Group and are expected to be paid in one year.

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Contingency — In the ordinary course of business, the Group may be subject to legal proceedings regarding contractual and employment relationships and a variety of other matters. The Group records contingent liabilities resulting from such claims, when a loss is assessed to be probable and the amount of the loss is reasonably estimable. There was a dispute with a previous landlord in 2021, however, the lawsuit is in its early stage and the final outcome, including the potential amount of any losses, is uncertain. As a result, no reasonable estimate of loss can be made as of March 31, 2023.

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11.Concentration Risk

Concentration of Credit Risk

Assets that potentially subject the Group to significant concentrations of credit risk primarily consist of cash and cash equivalents, and accounts receivable. As of March 31, 2023 and December 31, 2022, the cash and cash equivalents are deposited within federally insured banks, which are typically below the insured limits.

Concentration of Customers

For the three months ended March 31, 2023, there were two customers representing 13.4% and 11.5% of total net revenues, respectively. For the three months ended March 31, 2022, there were two customers representing 29.5% and 28.3% of total net revenues, respectively. For the three months ended March 31, 2023, there was one vendor representing 10.4% of total purchase. For the three months ended March 31, 2022, there was one vendor representing 32.4% of total purchase. As of March 31, 2023, there were two customers representing 10.4% and 10.3% of total accounts receivable, respectively.

12.Subsequent Events

Additional financing through the existing SEPA equity line

On April 24, 2023, the Group sold to YA II PN, LTD 110,000 shares of common stock pursuant to the SEPA (Note 7) and received $72 in net proceeds from the sale.

The Group has evaluated subsequent events through the date of issuance of the unaudited condensed consolidated financial statements, there were no other subsequent events occurred that would require recognition or disclosure in the consolidated financial statements.

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Other states like New York, New Jersey and Massachusetts are also expected to bring in regulatory requirements for key end user segments like, transit agencies and school buses to switch to all electric transportation options. Fifteen other states including Connecticut, Colorado, Hawaii, Maine, Maryland, Massachusetts, New Jersey, New York, North Carolina, Oregon, Pennsylvania, Rhode Island, Vermont, and Washington have committed to follow California’s Advanced Clean Trucks Regulation. Primarily driven by the urgent need to meet carbon and greenhouse gas emission reduction targets, various state and federal agencies are also supporting the switch to zero emission transportation, providing a host of funding and incentive support to develop, demonstrate and deploy zero emission transportation solutions. Some of the key funding / incentives driving adoption of electric medium duty vehicles include:

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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.

For the three months ended March 31, 2023 and 2022, our costs of revenues were $1.6 million and $0.6 million, respectively. The 191.8% increase in cost of revenues was primarily driven by the increase in revenue.

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 March 31, 2023 and 2022, our combined gross margin was 9.7% and 17.9%, respectively. This is primarily attributable to lower margins for forklift sales and others increased fixed costs, partially offset by higher margins for EV sales and EV leasing.

Operating Expenses

Operating expenses consist of selling, general, and administrative expenses.

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

For the three months ended March 31, 2023 and 2022, our operating expenses were $3.8 million and $3.0 million, respectively. The increase in operating expenses was mainly due to increases in payroll and research and development expenses.

Other Income, net

Other income, net includes interest expense, gain on sales-type leases and other income.

Our other income for the three months ended March 31, 2023, was $0.9 million, primarily due to refund of employee retention credit (“ERC”) from IRS.

Our other income for the three months ended March 31, 2022, was $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 March 31, 2023 and 2022, was $2.8 million and $2.3 million, respectively.

Recent Accounting Pronouncements

See Note 3 “Summary of Significant Accounting Policies” to our consolidated financial statements in our Form 10-K filed on March 31, 2023 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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Accounting Pronouncements Issued But Not Yet Adopted

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”), which provides elective amendments for entities that have contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. These amendments were effective immediately and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848), to expand and clarify the scope of Topic 848 to include derivative instruments on discounting transactions. The amendments in this ASU are effective in the same timeframe as ASU 2020-04. In December 2022, the FASB issued ASU 2022-06, Reference Rate reform (Topic 848): Deferral of the Sunset Date of Topic 848, which deferred the sunset date of Topic 848, Reference Rate Reform to December 31, 2024. The Group is currently evaluating the impact this guidance will have on its consolidated 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 (“ASU 2021-08”), which requires entities to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606, Revenue from Contracts with Customers (“ASC 606”). The update will generally result in an entity recognizing contract assets and contract liabilities at amounts consistent with those recorded by the acquiree immediately before the acquisition date rather than at fair value. ASU 2021-08 is effective on a prospective basis for fiscal years beginning after December 15, 2022, with early adoption permitted. The Group adopted ASU 2021-08 effective January 1, 2023 and apply the guidance to subsequent acquisitions. The adoption of ASU 2021-08 will only impact the accounting for the Group’s future acquisitions.

The Group does not believe other recently issued but not yet effective accounting standards, if currently adopted, would have a material effect on the consolidated financial position, statements of operations and cash flows.

Liquidity and Capital Resources

As of March 31, 2023 and December 31, 2022, we had cash, cash equivalents and non-current restricted cash of $0.4 million and $0.4 million, respectively. As of March 31, 2023, we had restricted cash of $0.3 million deposited in an escrow account. We have incurred a net loss of $2.8 million during the three months ended March 31, 2023, and the net cash used in operating activities was $1.1 million. As of March 31, 2023, we had accumulated deficit of $31.3 million. These factors raise substantial doubt as to our ability to continue as a going concern. We plan to continue implementing various measures to boost revenue and control the cost and expenses within an acceptable level. Such measures include: 1) align capacity with demand and prioritize production for high margin products in our order backlog; 2) expand and strengthen strategic partnership to outsource a significant portion of design and engineering work for next generation product to third party vendors and suppliers to control overall development costs; 3) negotiate better payment terms with customers and for some of the new orders, require down payments; 4) implement comprehensive budget control and reduce operating expenses; and 5) calibrate capital allocation to manage liquidity and drive near-term goals without compromising long-term growth; 6) continue to proactively implement a robust capital market strategy to provide financing for our operations through proceeds from public or private stock offering, debt financings including but not limited to term loans, revolving line of credit and equity linked instruments, and potentially federal and state incentive funding programs. There is no assurance that the plans will be successfully implemented. If we fail to achieve these goals, we may need additional financing to execute our business plan, and we may not be able to obtain the necessary additional capital on a timely basis, on acceptable terms, or at all. In the event that financing sources are not available, or that we are unsuccessful in increasing our gross profit margin and reducing operating losses, we may be unable to implement our current plans for expansion, or respond to competitive pressures, any of which would have a material adverse effect on our business, financial condition and results of operations and may materially adversely affect our ability to continue as a going concern. Our unaudited condensed consolidated financial statements do not include any adjustments that may result from the outcome of these uncertainties.

A summary of the cash flow activities is as follows:

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Operating Activities

Net cash used in operating activities was $1.1 million for the three months ended March 31, 2023, primarily as a result of (i) a net loss of $2.8 million, adjusted by non-cash items of depreciation and amortization of $0.4 million and amortization of right of use of assets of $0.3 million, partially offset by (ii) a decrease in inventories of $0.8 million, (iii) a decrease in prepaid expenses and other assets of $0.2 million.

Net cash used in operating activities was $2.7 million for the three months ended March 31, 2022, primarily as a result of (i)  a net  loss of $2.3 million, adjusted by non-cash items of depreciation and amortization of $0.4 million and forgiveness of PPP loan of $0.6 million, (ii) an increase in inventories of $0.4 million, (iii) an increase in prepared and other current asset of 0.3 million, partially offset by (iv) a decrease in account receivable $0.3 million, and (v) an increase in account payable of $0.4 million .

Investing Activities

Net cash used in investing activities was $0.1 million for the three months ended March 31, 2023.

No cash used in investing activities for the three months ended March 31, 2022.

Financing Activities

Net cash generated from financing activities was $1.2 million for the three months ended March 31, 2023, primarily as a result of net proceeds from tapping the SEPA (see Note 7).

Net cash generated from financing activities was $0.1 million for three months ended March 31, 2022, primarily as a result of intercompany borrowing from the controlling shareholder, SPI Energy Inc.

Capital Expenditures

We incurred capital expenditures of $0.1 million for the three months ended March 31, 2023.

No capital expenditures for the three months ended March 31, 2022.

Trend information

Our operating results substantially depend on revenues derived from our sales and leasing of EVs. Other than as disclosed elsewhere in this prospectus, the following trends, uncertainties, demands, commitments, or events for 2023 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:

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Off-Balance Sheet Arrangements

As of March 31, 2023, 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 10 to the unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report Form 10-Q.

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fiscal quarter ended March 31, 2023, 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 ineffective 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, 2022, we identified following material weaknesses, in the design or operation of internal controls.

(1)Failure to maintain an effective control environment of internal control over financial reporting;

(3)Ineffective monitoring activities to assess the operation of internal control over financial reporting;

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 2023 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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