10-Q/A: Phoenix Motor Inc. Restates Financials for Q2 2024 Due to Warrant Classification Error

Phoenix Motor Inc. is restating its Q2 2024 financial statements due to an error in classifying warrants issued with common stocks during private placements.

Summary

• Phoenix Motor Inc. is filing an amendment to its Q2 2024 report to restate its financial statements.
• The restatement is due to a misclassification of warrants issued with common stocks during private placements.
• These warrants were incorrectly classified as equity instruments instead of liability instruments.
• The error affected the warrant liability, additional paid-in capital, accumulated deficit, gain on change in fair value of warrant liability, loss on warrants, and net income.
• The audit committee concluded that the Q1 and Q2 2024 financial statements should no longer be relied upon.
• Management identified material weaknesses in internal control over financial reporting related to period-end financial disclosure and reporting processes.
• The company is implementing a remediation plan to address these weaknesses.
• The only changes to the Q2 10-Q are those related to the misstatements.
• The company had 37,648,492 shares of common stock outstanding as of October 23, 2024.
• The company completed the acquisition of the Proterra transit business unit on January 11, 2024, and the Proterra battery lease contracts on February 7, 2024.
• The company entered into an asset purchase agreement with Zenobe on June 24, 2024, to sell the battery lease receivables.

Sentiment

Score: 4

Explanation: The sentiment is neutral to slightly negative due to the restatement of financials and identified internal control weaknesses, offset by the positive impact of the Proterra acquisition and revenue growth.

Positives

• The company is implementing a remediation plan to address the material weaknesses in its internal control over financial reporting.
• The company completed the acquisition of the Proterra transit business unit and battery lease contracts, expanding its business operations.
• The company entered into an agreement to sell battery lease receivables, potentially improving its financial position.

Negatives

• The company's Q2 2024 financial statements were misstated due to a warrant classification error.
• The company identified material weaknesses in its internal control over financial reporting.
• The company's Q1 and Q2 2024 financial statements should no longer be relied upon.

Risks

• The company's internal control weaknesses could lead to future financial misstatements.
• The company's remediation plan may not be successful in addressing the underlying causes of the material weaknesses.
• Changes in the fair values of assets acquired and liabilities assumed during the measurement period may result in material adjustments to gain on bargain purchase.
• The company's ability to continue as a going concern is dependent on raising additional funds and implementing cost-cutting measures.

Future Outlook

The company plans to continue pursuing strategies to improve liquidity and raise additional funds while implementing various measures to cut costs, including operation integration, cost structure re-establishment, strategic partnerships, working capital initiatives, cash saving initiatives, and a robust capital market strategy.

Industry Context

The document highlights the growing emphasis on improving air quality and the increasing adoption of electric vehicles, driven by government subsidies and incentive policies. The company is positioned to benefit from these trends, particularly in the medium-duty and transit bus segments.

Comparison to Industry Standards

• The document does not provide specific comparisons to industry standards or competitors.
• However, it mentions the company's reliance on the Ford E-Series chassis, which is the dominant chassis in the medium-duty Class 4 market in the U.S.

Legal Proceedings

• In April 2024, there was a dispute with the landlord of Folsom warehouse which the landlord seeks to recover damages in excess of $ 250 .

Related Party Transactions

• During the six months ended June 30, 2024, the Group borrowed of $ 1,041 from SPI.
• In April 2024, SPI borrowed $ 316 from the Group and returned $ 50 of loan principal.
• On June 22, 2024, the Group entered into a loan agreement with SPI.
• During the six months ended June 30, 2024, SPI billed the Group $ 528 for legal, human resources and IT services provided by SPI employees and all of the amount was paid.
• On March 6, 2024, SPI entered into a Deed of Settlement with its creditor, Streeterville Capital, LLC (Streeterville) to settle the unpaid balances of certain convertible notes via installment payments as agreed in the Deed of Settlement.

Stakeholder Impact

• Shareholders may experience dilution due to the issuance of common stock for convertible note conversions.
• Employees may be affected by cost-cutting measures and workforce realignment.
• Customers may benefit from the company's expanded product offerings and improved financial stability.
• Suppliers may be impacted by the company's efforts to negotiate better payment terms and optimize its supply chain.

Next Steps

• The company must file its Form 10-Q for the period ended June 30, 2024, as required by the Listing Rule.
• The company must regain compliance with the Minimum Bid Price Requirement by April 7, 2025.
• The company must implement measures designed to improve the Companys internal control over financial reporting to address the underlying causes of these material weaknesses.

Key Dates