Phoenix Motor (PEV) - 2023 Q2 - Quarterly Report

Part I. Financial Information This section covers the interim financial statements, management's discussion and analysis, market risk, and internal controls Item 1. Interim Financial Statements The interim financial statements reveal a weakened financial position, increased net loss, improved operating cash flow, and significant going concern doubts Condensed Consolidated Balance Sheets The balance sheets show a decline in total assets and stockholders' equity, alongside a shift to a working capital deficit Condensed Consolidated Balance Sheet Summary (in thousands) | Account | June 30, 2023 (Unaudited) | December 31, 2022 | | :--- | :--- | :--- | | Total Current Assets | $5,709 | $7,721 | | Total Assets | $17,997 | $20,443 | | Total Current Liabilities | $6,175 | $4,789 | | Total Liabilities | $10,297 | $8,161 | | Total Stockholders' Equity | $7,700 | $12,282 | | Total Liabilities and Stockholders' Equity | $17,997 | $20,443 | - The company's financial position weakened, with total assets decreasing by 12.0% and total stockholders' equity declining by 37.3% from December 31, 2022, to June 30, 2023. A notable shift from a working capital surplus to a deficit of $466 thousand occurred during this period[9][36] Unaudited Condensed Consolidated Statements of Operations Despite revenue growth, the statements of operations indicate a significant drop in gross profit and a widened net loss Consolidated Statements of Operations Summary (in thousands, except per share data) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Revenues | $1,158 | $1,499 | $2,939 | $2,170 | | Gross Profit (Loss) | $(61) | $325 | $112 | $445 | | Operating Loss | $(3,161) | $(1,965) | $(6,834) | $(4,868) | | Net Loss | $(3,177) | $(1,925) | $(5,955) | $(4,247) | | Net Loss Per Share (Basic & Diluted) | $(0.15) | $(0.11) | $(0.28) | $(0.24) | - For the six months ended June 30, 2023, revenues increased by 35.4% year-over-year, but the net loss widened by 40.2% due to a significant drop in gross profit and higher operating expenses[10] Unaudited Condensed Consolidated Statements of Cash Flows Cash flow statements show improved operating cash usage but a reduced overall cash increase due to lower financing activities Consolidated Statements of Cash Flows Summary (in thousands) | Cash Flow Activity | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | | Net cash used in operating activities | $(1,678) | $(8,374) | | Net cash (used in) provided by investing activities | $(766) | $265 | | Net cash generated from financing activities | $2,687 | $13,440 | | Increase in cash, cash equivalents and restricted cash | $243 | $5,331 | | Cash, cash equivalents and restricted cash at end of period | $632 | $8,014 | - Cash from financing activities in the first half of 2023 was primarily from convertible notes ($1.46 million) and a standby equity purchase agreement ($1.23 million), compared to $13.4 million from the IPO in the prior year period[15] Notes to Unaudited Condensed Consolidated Financial Statements Notes detail the company's business, significant going concern issues, recent capital raises, and other critical financial disclosures - The company's primary business involves designing, assembling, and integrating electric drive systems for medium-duty commercial fleet vehicles, and selling material handling products like electric forklifts[17][18] - The company has a working capital deficit of $466 thousand and has incurred a net loss of $6.0 million for the six months ended June 30, 2023, raising substantial doubt about its ability to continue as a going concern. Management plans include cost-cutting, strategic partnerships, and raising additional capital[36][37] - In June 2023, the company entered into a Securities Purchase Agreement to issue up to $5.1 million in unsecured senior convertible promissory notes to raise capital[52] - For the six months ended June 30, 2023, no single customer represented 10% or more of total net revenues, a change from 2022 where three customers accounted for 29%, 18%, and 10% respectively[59] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses revenue growth driven by EV deliveries, declining gross margins, increased operating expenses, critical liquidity issues, and external market influences Results of Operations Revenue increased due to EV sales, but gross margin significantly declined, and operating expenses rose, leading to a wider net loss Revenue by Category (in thousands) | Category | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | | Sales of EVs | $1,868 | $788 | | Lease of EVs | $215 | $275 | | Sales of Forklifts | $270 | $741 | | Others | $586 | $366 | | Total | $2,939 | $2,170 | - The increase in total revenue for the first six months of 2023 was primarily driven by a 137% increase in EV sales, which was partially offset by a 63.6% decrease in forklift sales[75][76] - Gross margin for the six months ended June 30, 2023, decreased to 4% from 21% in the same period of 2022, attributed to higher service-related costs and increased fixed costs[80] - Operating expenses for the six months ended June 30, 2023, increased by 30.7% to $6.9 million, mainly due to higher research and development expenses[82] Liquidity and Capital Resources The company faces critical liquidity challenges, a working capital deficit, and going concern doubts, necessitating strategic cost reductions and external financing - The company's financial state is precarious, with a working capital deficit of $466 thousand and an accumulated deficit of $34.5 million as of June 30, 2023[90] - Management has outlined a multi-pronged strategy to improve liquidity, including reducing the workforce, outsourcing R&D, negotiating better payment terms, and pursuing additional financing through stock or debt offerings[90] Cash Flow Summary (in thousands) | Cash Flow Activity | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | | Net cash used in operating activities | $(1,678) | $(8,374) | | Net cash (used in) provided by investing activities | $(766) | $265 | | Net cash generated from financing activities | $2,687 | $13,440 | Trend information Key trends, including the Inflation Reduction Act, ongoing supply chain disruptions, and rising inflation, significantly impact the company's operations and customer demand - The Inflation Reduction Act (IRA) offers substantial tax credits for commercial ZEVs, but uncertainty regarding IRS guidance has led to a delay in customer orders[100] - Ongoing supply-chain challenges, particularly for chassis and raw materials, are causing longer lead times and increasing working capital needs[100] - Inflation is driving up the costs of raw materials, labor, and shipping, while higher interest rates may negatively impact customer demand and financing capabilities[100] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section is not applicable as the company qualifies as a smaller reporting company - Disclosure is not required as the registrant is a smaller reporting company[103] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were ineffective due to identified material weaknesses, with remediation plans underway - Management concluded that disclosure controls and procedures were ineffective as of June 30, 2023[104] - Material weaknesses identified include an ineffective control environment, inadequate risk assessment, ineffective monitoring, and insufficient controls and resources for financial reporting[107] - The company plans to remediate these weaknesses by hiring more qualified staff, establishing a formal control framework, and improving review processes[106] Part II. Other Information This section includes information on legal proceedings, risk factors, and other miscellaneous disclosures Item 1. Legal Proceedings The company is involved in various legal proceedings arising in the normal course of business but does not believe any pending proceeding would have a material impact on its financial condition - The company states that it is not involved in any legal proceedings that are expected to have a material adverse effect on its financial condition[109] - A specific contingency mentioned is a dispute with a former landlord, but the outcome and potential loss are currently uncertain[57][110] Item 1A. Risk Factors There have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the fiscal year ended December 31, 2022 - No material changes have been made to the risk factors disclosed in the 2022 Form 10-K filed on March 31, 2023[111] Other Items (2, 3, 4, 5, 6) Under Part II, the company reports no unregistered sales of equity securities, no defaults upon senior securities, no mine safety disclosures, and no other information to disclose for the period - The company reported 'None' for Item 2 (Unregistered Sales of Equity Securities), Item 3 (Defaults upon senior securities), and Item 5 (Other information)[112][113][115] - Item 4 (Mine safety disclosures) was marked as 'Not applicable'[114] - Item 6 lists the exhibits filed with the 10-Q, including the Securities Purchase Agreement, Form of Note, and various officer certifications[117]