EVTV Envirotech Vehicles Inc

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial condition and the results of operations should be read in conjunction with the unaudited consolidated financial statements and notes thereto included in this Quarterly Report on Form 10-Q (“Quarterly Report”). This discussion contains forward-looking statements that are subject to known and unknown risks, uncertainties, and other factors that may cause our actual results to differ materially from those expressed or implied by such forward-looking statements. These risks, uncertainties, and other factors include, among others, those identified under the “Special Note Regarding Forward-Looking Statements” above, and elsewhere in this Quarterly Report, particularly in Part II, Item 1A “Risk Factors,” below.

Overview

We are a provider of purpose-built zero-emission electric vehicles focused on reducing the total cost of vehicle ownership and helping fleet operators unlock the benefits of green technology. We serve commercial and last-mile fleets, school districts, public and private transportation service companies and colleges and universities to meet the increasing demand for light to heavy-duty electric vehicles. Our vehicles address the challenges of traditional fuel price instability and local, state and federal regulatory compliance.

As discussed in Item 1, Notes 2 and 3 to the unaudited consolidated financial statements contained in this Quarterly Report on Form 10-Q, as a result of the closing of the Merger on March 15, 2021, the historical results discussed in this section of the Quarterly Report on Form 10-Q are those of EVTDS as of September 30, 2022, which include the consolidated balance sheet accounts of Envirotech Vehicles, Inc. (formerly ADOMANI, Inc.) and subsidiaries, and for the fiscal periods ended September 30, 2022, which include the consolidated results of operations of EVTDS and Envirotech Vehicles, Inc. (formerly ADOMANI, Inc.) and subsidiaries for the entire three and nine month periods. The consolidated financial statements and related disclosures as of March 31, 2021 include the consolidated balance sheet accounts of Envirotech Vehicles, Inc. (formerly ADOMANI, Inc.) and subsidiaries, including EVTDS. The consolidated results of operations for the three months ended March 31, 2021 include the results of operations of EVTDS for the entire period and include the consolidated results of operations of Envirotech Vehicles, Inc. (formerly ADOMANI, Inc.) and subsidiaries for the post-merger period March 16, 2021 through March 31, 2021. On May 26, 2021, the Company filed a Certificate of Amendment of Amended and Restated Certificate of Incorporation of the Company with the Secretary of State of the State of Delaware to change its name from ADOMANI, Inc. to Envirotech Vehicles, Inc., effective as of May 26, 2021.

For the three months ended September 30, 2022 and 2021, we generated sales revenue of $3,882,670 and $709,092, respectively, and our net income for the three months ended September 30, 2022 was $126,749. Our net loss for the three months ended September 30, 2021 was $850,475. For the nine months ended September 30, 2022 and 2021, we generated sales revenue of $7,078,870 and $1,368,151, respectively, and our net losses were $3,410,912 and $2,402,064, respectively. The 2022 loss includes approximately $1.72 million of non-cash net expenses.

Factors Affecting Our Performance

We believe that the growth and future success of our business depend on various opportunities, challenges and other factors, including the following:

COVID-19 pandemic. Global health concerns related to the ongoing COVID-19 pandemic have resulted in social, economic and labor instability in the countries in which we or the third parties with whom we engage operate, and resulted in unexpected legal and regulatory changes, such as travel, social distancing and quarantine policies, boycotts, curtailment of trade, and other business restrictions that have negatively impacted our ability to procure and sell our products and provide our services. Accordingly, our future performance will depend in part upon our ability to successfully respond and adapt to these challenges. We have developed, and continue to develop, plans to address the ongoing effects and help mitigate the potential negative impact of the pandemic on our business.

Availability of government subsidies, rebates and economic incentives. We believe that the availability of government subsidies, rebates, and economic incentives is currently a critical factor considered by our customers when purchasing our zero-emission systems or converting their existing vehicles to zero-emission-electric or hybrids, and that our growth depends in large part on the availability and amounts of these subsidies and economic incentives. As an alternative to being dependent on such funding, however, we are exploring the possibility of leasing our vehicles to our customers as well.

New customers. We are competing with other companies and technologies to help fleet managers and their districts/companies more efficiently and cost-effectively manage their fleet operations. Once these fleet managers have decided they want to buy from us, we still face challenges helping them obtain financing options to reduce the cost barriers to purchasing. We may also encounter customers with inadequate electrical services at their facilities that may delay their ability to purchase from us.

Dependence on external sources of financing of our operations. We have historically depended on external sources for capital to finance our operations. Accordingly, our future performance will depend in part upon our ability to achieve independence from external sources for the financing of our operations.

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Investment in growth. We plan to continue to invest for long-term growth. We anticipate that our operating expenses will increase in the foreseeable future as we invest in research and development to enhance our zero-emission electric vehicles and systems; design, develop and manufacture our commercial fleet vehicles and their components; increase our sales and marketing to acquire new customers; and increase our general and administrative functions to support our growing operations. We believe that these investments will contribute to our long-term growth, although they will adversely affect our results of operations in the near term. In addition, the timing of these investments can result in fluctuations in our annual and quarterly operating results.

Zero-emission electric vehicle experience. Our dealer and service network is not currently completely established, although we do have certain agreements in place. One issue they may have, and we may encounter, is finding appropriately trained technicians with zero-emission electric fleet vehicle experience. Our performance will depend on having a robust dealer and service network, which will require appropriately trained technicians to be successful. Because vehicles that utilize our technology are based on a different technology platform than traditional internal combustion engines, individuals with sufficient training in zero-emission electric vehicles may not be available to hire, and we may need to expend significant time and expense training the employees we do hire. If we are not able to attract, assimilate, train or retain additional highly qualified personnel in the future, or do so cost-effectively, our performance would be significantly and adversely affected.

Market growth. We believe the market for all-electric solutions for alternative fuel technology, specifically all-electric vehicles, will continue to grow as more purchases of new zero-emission vehicles and as more conversions of existing fleet vehicles to zero-emission vehicles are made. However, unless the costs to produce such vehicles decrease dramatically, purchases of our products will continue to depend in large part on financing subsidies from government agencies. We cannot be assured of the continued availability, the amounts of such assistance to our customers, or our ability to access such funds.

Sales revenue growth from additional products. We seek to add to our product offerings additional zero-emission vehicles of all sizes to be marketed, sold, warrantied and serviced through our developing distribution and service network, as well as add other ancillary products discussed elsewhere in this report.

Third-party contractors, suppliers and manufacturers. We rely upon third parties to supply us with raw materials, parts, components and services in adequate quantity in a timely manner and at reasonable prices, quality levels, and volumes acceptable to us.

Components of Results of Operations

Sales

Sales are recognized from the sales of new, purpose-built zero-emission electric vehicles and from providing vehicle maintenance and safety inspection services. Sales are recognized in accordance with Accounting Standards Codification (“ASC”) Topic 606, as discussed in Note 2 to our unaudited consolidated financial statements included in this Quarterly Report.

Cost of Sales

Cost of sales includes those costs related to the development, manufacture, and distribution of our products. Specifically, we include in cost of sales each of the following: material costs (including commodity costs); freight costs; labor and other costs related to the development and manufacture of our products; and other associated costs. Cost of sales also includes costs related to the valuation of inventory due to impairment, obsolescence, or shrinkage.

General and Administrative Expenses

Selling, general and administrative expenses include all corporate and administrative functions that support our company, including personnel-related expense and stock-based compensation costs; costs related to investor relations activities; warranty costs, including product recall and customer satisfaction program costs; consulting costs; marketing-related expenses; and other expenses that cannot be included in cost of sales.

Consulting and Research and Development Costs

These expenses are related to our consulting and research and development activity.

Other Income/Expenses, Net

Other income/expenses include non-operating income and expenses, including interest income and expense.

Provision for Income Taxes

We account for income taxes in accordance with Financial Accounting Standards Board (“FASB”) ASC 740 “Income Taxes,” which requires the recognition of deferred income tax assets and liabilities for the future tax consequences attributable to differences between the financial statements carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under FASB ASC 740, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period the enactment occurs. A valuation allowance is provided for certain deferred tax assets if it is more likely than not that we will not realize tax assets through future operations. Because we have incurred only losses to this point, no provision for income taxes has been made in 2022.

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Results of Operations

The following discussion compares operating data for the three and nine months ended September 30, 2022 to the corresponding periods ended September 30, 2021:

Sales

Sales were $3,882,670 and $709,092 for the three months ended September 30, 2022 and 2021, respectively, and $7,078,870 and $1,368,151 for the nine months ended September 30, 2022 and 2021, respectively. Sales for the three months ended September 30, 2022 consisted of three cab and chassis trucks to a dealer and 34 logistic cargo vans sold primarily to customers in New Jersey who utilized a voucher from the NJ ZIP program. Sales for the nine months ended September 30, 2022 consisted of the sales in the third quarter plus 13 cargo vans sold to factory authorized representatives, one logistics cargo van sold to a dealer and 11 logistics cargo vans sold primarily to New Jersey customers utilizing the NJ ZIP program. In addition, three cab and chassis trucks and three used buses were also sold. Sales attributable to higher vehicle selling price were $585,125 and $746,390 for the three and nine months ended September 30, 2022, respectively.

Cost of Sales

Cost of sales were $2,046,491 and $469,611 for the three months ended September 30, 2022 and 2021, respectively, and $3,998,533 and $930,977 for the nine months ended September 30, 2022 and 2021, respectively. Cost of sales for the three and nine months ended September 30, 2022 and 2021 consisted of the costs related to the sale of the vehicles sold as described above and, in early 2022, for the costs of providing maintenance and inspection services that have been discontinued.

General and Administrative Expenses

General and administrative expenses were $1,619,210 and $1,344,840 for the three months ended September 30, 2022 and 2021, respectively, an increase of $274,370. The increase was primarily due to $143,821 of professional fees (primarily legal fees); to insurance costs of $136,252, to $100,692 of increased payroll expense; to rents of $94,952, to contract labor costs of $82,503 primarily related to engineering and technical assistance; to advertising and marketing expenses of $78,871; to travel and related expenses of $53,003 related primarily to tradeshows and sales. These increases were partially reduced by a reduction in bad debt expenses of $253,879, non cash stock-based compensation expense of $121,132, and reductions of $40,713 in other general and administrative expenses compared to the 2021 period. The third quarter 2022 general and administrative expenses include $50,000 of non-cash bad debt expense and $19,092 of non-cash depreciation expense. The general and administrative expenses for the three months ended September 30, 2021 included non-cash depreciation expense of $7,655.

General and administrative expenses were $6,142,194 and $2,766,989 for the nine months ended September 30, 2022 and 2021, respectively, an increase of $3,375,205. The increase was primarily related to $1,493,713 non-cash stock-based compensation expense recorded with respect to the stock options granted during the first quarter of 2022. Other increases were due to payroll-related expenses of $643,101; to professional fees of $372,903 (primarily legal fees); to contract labor costs of $273,421 primarily related to engineering and technical assistance; to insurance costs of $271,654; to advertising and marketing expenses of $247,944; to travel and related expenses of $151,594 related primarily to finalizing logistics and moving into the Osceola, Arkansas manufacturing location and tradeshows, information and communications technologies of $78,388, subscriptions and continuing education of $47,162, and to increases in other general and administrative expenses of $75,204. These increases were partially reduced by a reduction in bad debt of $279,879 compared to the 2021 period. The general and administrative expenses for the nine months ended September 30, 2022 include $1,721,545 in non-cash charges, with depreciation expense of $56,700 and bad debt expense related to trade receivables of $50,000 being added to stock-based compensation expense of $1,614,845. The general and administrative expenses for the nine months ended September 30, 2021 included $468,042 in non-cash charges, including $303,879 in bad debt expense unrelated to trade accounts receivable, $121,132 in stock-based compensation expense and depreciation expense of $43,031.

Consulting Expenses

Consulting expenses were $94,187 and $36,735 for the three months ended September 30, 2022 and 2021, respectively, and $264,505 and $142,092 for the nine months ended September 30, 2022 and 2021, respectively. The increase in the current year period was due primarily to payments to an Arkansas state relationship and incentive consulting firm that assisted the Company in securing the manufacturing facility in Osceola, Arkansas and to the cost of the ASC 805 valuation report related to the Merger.

Research and Development Expenses

Research and development expenses were $25,000 and $112,412 for the three and nine months ended September 30, 2022 and no expense was incurred for the three and nine months ended September 30, 2021. The increase in the current year period was due to the development of new product lines which includes a school bus and Class 5 cab over chassis truck.

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Operating Activities

Cash (used in) operating activities is primarily the result of our operating losses, reduced by the impact of non-cash expenses, including non-cash stock-based compensation, and changes in the asset and liability accounts.

Net cash used in operating activities for the nine months ended September 30, 2022 was $8,271,750 versus net cash used in operating activities of $9,917,328 for the nine months ended September 30, 2021, a decrease of $1,645,578. The decrease in net cash used in operating activities was due to decreases in the cash used for inventory deposits of $4,205,305; increases in net non cash items of $1,558,348 (primarily stock-based compensation expense of $1,493,713), a decrease in cash used to reduce accrued liabilities of $1,926,363; a decrease in cash used to purchase inventory of $1,039,489; a decrease in cash used to increase other non-current liabilities of $242,749; a decrease in cash used to reduce accounts payable of $230,569; and a decrease in other non-current assets of $158,265. These sources of cash were partially offset by an increase in net loss of $1,008,848; an increase in accounts receivable of $5,692,072, and an increase in prepaid expenses of $1,014,590, resulting in the net reduction of $1,645,578. .

We expect cash used in operating activities to fluctuate significantly in future periods as a result of a number of factors, some of which are outside of our control, including, among others: the success we achieve in generating revenue; the success we have in helping our customers obtain financing to subsidize their purchases of our products; our ability to efficiently develop our dealer and service network; the costs of batteries and other materials utilized to make our products; the extent to which we need to invest additional funds in research and development; and the amount of expenses we incur to satisfy future warranty claims.

Investing Activities

Net cash provided by investing activities during the nine months ended September 30, 2022 increased by $9,596,847 to $5,942,221, as compared to cash used in investing activities of $3,654,626 during the nine months ended September 30, 2021. The increase in net cash provided by investing activities during the nine months ended September 30, 2022 is primarily due to a decrease in investments in marketable securities of $9,708,964 and the increased sale of marketable securities of $3,323,461, partially offset by the absence in 2022 of the $3,373,332 cash acquired in merger in 2021 and an increase of $62,246 in capital expenditures.

Financing Activities

Net cash provided by financing activities during the nine months ended September 30, 2022 decreased by $22,176,074 to $106,234 from cash provided by financing activities in 2021 of $22,282,308. The decrease consisted primarily of the pre-merger $6,415,110 proceeds from the issuance of common stock raised by EVTDS in 2021 in anticipation of the Merger; a second common stock offering post-merger which raised $16,274,991, and $90,087 raised in 2021 from the issuance of stock for stock options that were exercised versus $120,000 raised in 2022 from the issuance of stock for stock options that were exercised. The 2021 cash provided was reduced by offering costs of $188,015; there were no offering costs incurred in the 2022 period. The proceeds from the issuance of common stock were further reduced in 2022 by the Company making installment payments of $13,766 on its debt, and in 2021 by EVTDS and ADOMANI, Inc. both repaying their SBA EIDL loans in the combined amount of $309,865.

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Liquidity and Capital Resources

As of September 30, 2022, we had cash and cash equivalents of $2,683,230 and marketable securities of $1,976,308, a combined total of $4,659,538 and working capital of approximately $20.3 million. We believe that our existing cash, cash equivalents and marketable securities will be sufficient to fund our operations during the next twelve months and beyond. However, we may not successfully execute our business plan, and if we do not, we may need additional capital to continue our operations and support the increased working capital requirements associated with the fulfillment of purchase orders.

On February 2022, the Company announced Osceola, Arkansas as the site of its state-of-the-art manufacturing facility and new corporate offices. The Company has moved into an approximately 580,000 square foot facility and is currently in final stages of due diligence and contract negotiation with the City of Osceola and the Arkansas Economic Development Commission. However, additional debt and/or equity capital will be required in order to purchase related equipment and set up production lines and is expected to require up to $80 million of additional investment through 2027. Investments and employee hiring requirements over the next 10 years will provide an opportunity for the Company to obtain local tax incentives granted to the Company of up to $27 million, provided that the qualifying expenditures are made. The Company is not currently contractually obligated to make the expenditures.

Line of Credit

Effective August 4, 2022, EVT secured a line of credit from Centennial Bank. Borrowings under the line of credit bear interest at 2.75% annually. There is no maturity date for the line, but Centennial Bank may at any time, in its sole discretion and without cause, demand the Company to immediately repay any and all outstanding obligations under the line of credit in whole or in part. The line is secured by the cash and cash equivalents maintained by the Company in its Centennial Bank accounts. Borrowings under the line may not exceed cash, cash equivalents, and marketable securities balances up to $1,000,000. There was no principal amount outstanding on September 30, 2022 and there is no current plan to borrow from it

Capital Expenditures

We do not have any contractual obligations for ongoing capital expenditures at this time. We do, however, purchase equipment necessary to conduct our operations on an as needed basis and will begin increasing those expenditures as the Company transfers assembly and corporate functions to the newly announced Osceola Arkansas facility.

Contractual Obligations

Other than as disclosed in the unaudited consolidated financial statements in Item 1 of this Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2022, the Company has no contractual obligations.

Critical Accounting Policies and Significant Judgments and Estimates

Our consolidated financial statements are prepared in accordance with GAAP. The preparation of our consolidated financial statements and related disclosures requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, costs and expenses, and the disclosure of contingent assets and liabilities in our financial statements. We base our estimates on historical experience, known trends and events and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions.

We define our critical accounting policies as those accounting principles generally accepted in the United States of America that require us to make subjective estimates and judgments about matters that are uncertain and are likely to have a material impact on our financial condition and results of operations as well as the specific manner in which we apply those principles.

Emerging Growth Company and Smaller Reporting Company Status

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act, or JOBS Act, and may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including reduced disclosure about our executive compensation arrangements, exemption from the requirements to hold non-binding advisory votes on executive compensation and golden parachute payments and exemption from the auditor attestation requirement in the assessment of our internal control over financial reporting. We may take advantage of these exemptions until the last day of the fiscal year following the fifth anniversary of our initial public offering or until such earlier time that we are no longer an “emerging growth company.”

We are also a “smaller reporting company” as defined in Rule 12b-2 under the Exchange Act. We may continue to be a smaller reporting company if either (i) the market value of our shares held by non-affiliates is less than $250 million or (ii) our annual revenue is less than $100 million during the most recently completed fiscal year and the market value of our shares held by non-affiliates is less than $700 million as of the last business day of our most recently completed second fiscal quarter. If we are a smaller reporting company at the time we cease to be an emerging growth company, we may continue to rely on exemptions from certain disclosure requirements that are available to smaller reporting companies.

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