CENNTRO ELECTRIC GROUP LIMITED
MANAGEMENT’S DISCUSSION AND ANALYSIS
(Unaudited)
ITEM 2.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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Introductory Note
Except as otherwise indicated by the context, references in this Quarterly Report on Form 10-Q (this “Form 10-Q”) to the “Company,” “Cenntro,” “we,” “us” or “our” are references to the combined business Cenntro
Electric Group Limited ACN 619 054 938 and its subsidiaries. The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) summarizes the significant factors affecting our results of operations,
liquidity, capital resources and contractual obligations. The following discussion and analysis should be read in conjunction with the Company’s unaudited condensed consolidated financial statements and related notes included elsewhere herein.
All amounts in the MD&A have been rounded to the nearest thousand unless otherwise indicated.
A. Key Components of Results of Operations
Net revenues
Up until the end of December 31, 2021, we generate revenue primarily through the sale of ECVs to our channel partners. Starting in 2022, especially after the acquisition of
CAE and the termination of the channel partners in North America, we have started to transform our go-to-market model to Cenntro Branded EV Centers globally. Historically (i.e. up until end of 2021), our vehicle revenues were generated mainly
by the sale of the Metro®. By the end of 2021, we began generating revenue from the sales of the Logistar™ 200 in Europe.
Net revenues for the three months of 2023 and 2022 were generated from (a) vehicles sales, which primarily represent net revenues from sales of Metro® vehicles (including
vehicle kits), Logistar™ 200, Logistar™ 260 and Logistar™ 100, (b) sales of ECV spare-parts related to our Metro® vehicles, and (c) other sales, which primarily were: (i) the sales of inventory of outsourced ECV batteries and (ii) charges on
services provided to channel partners for technical developments and assistance with vehicle homologation or certification.
Cost of goods sold
Cost of goods sold mainly consists of production-related costs including costs of raw materials, consumables, direct labor, overhead costs, depreciation of plants and
equipment, manufacturing waste treatment processing fees and inventory write-downs. We incur cost of goods sold in relation to (i) vehicle sales and spare-part sales, including, among others, purchases of raw materials, labor costs, and
manufacturing expenses that related to ECVs, and (ii) other sales, including cost and expenses that are not related to ECV sales.
Cost of goods sold also includes inventory write-downs. Inventories are stated at the lower of cost or net realizable value. The cost of raw materials is determined on the
basis of weighted average. The cost of finished goods is determined on the basis of weighted average and is comprised of direct materials, direct labor cost and an appropriate proportion of overhead. Net realizable value is based on estimated
selling prices less selling expenses and any further costs of completion. Adjustments to reduce the cost of inventory to net realizable value are made, if required, for estimated excess, obsolescence, or impaired balances. Write-downs are
recorded in the cost of goods sold in our statements of operations and comprehensive loss.
Operating expenses
Our operating expenses consist of general and administrative, selling and marketing expenses, and research and development expenses. General and administrative
expenses are the most significant components of our operating expenses. Operating expenses also include provision for doubtful accounts and impairment loss for long-lived assets.
Research and Development Expenses
Research and development expenses consist primarily of employee compensation and related expenses, prototype expenses, costs associated with assets acquired for research and
development, product development costs, production inspection and testing expenses, product strategic advisory fees, third-party engineering and contractor support costs and allocated overhead. We expect our research and development expenses to
increase as we continue to invest in new ECV models, new materials and techniques, vehicle management and control systems, digital control capabilities and other technologies.
Selling and Marketing Expenses
Selling and marketing expenses consist primarily of employee compensation and related expenses, sales commissions, marketing programs, freight costs, travel and entertainment
expenses and allocated overhead. Marketing programs consist of advertising, tradeshows, events, corporate communications and brand-building activities. We expect our selling and marketing expenses to increase as we introduce our new ECV models,
further develop additional local dealership and service support networks to augment our expanding sales globally.
General and Administrative Expenses
General and administrative expenses consist primarily of employee compensation and related expenses for administrative functions including finance, legal, human resources, and
fees for third-party professional services. While we will continue to monitor general and administrative expenses, we expect general and administrative expenses to materially increase over the next two years in connection with the execution of
our growth strategy, including the regionalization of our manufacturing and supply chain and expanded product offerings and expenses relating to being a public company.
Provision for doubtful accounts
A provision for doubtful accounts is recorded for periods in which we determine a loss is probable, based on our assessment of specific factors, such as troubled collections,
historical experience, accounts aging, ongoing business relations and other factors. Account balances are charged off against the provision after all means of collection have been exhausted and the potential for recovery is considered remote.
Impairment loss for long-lived assets
We evaluate the recoverability of long-lived assets or asset group with determinable useful lives whenever events or changes in circumstances indicate that an asset or a group
of assets’ carrying amount may not be recoverable. We measure the carrying amount of long-lived asset against the estimated undiscounted future cash flows expected to result from the use of the assets or asset group and their eventual
disposition. The carrying amount of the long-lived asset or asset group is not recoverable when the sum of the undiscounted expected future net cash flows is less than the carrying value of the asset being evaluated. Impairment loss is
calculated as the amount by which the carrying value of the asset exceeds its fair value. Fair value is generally determined by discounting the cash flows expected to be generated by the assets or asset group, when the market prices are not
readily available. The adjusted carrying amount of the assets become new cost basis and are depreciated over the assets’ remaining useful lives. Long-lived assets are grouped with other assets and liabilities at the lowest level for which
identifiable cash flows are largely independent of the cash flows of other assets and liabilities.
Other income (expenses)
Interest expense, net
Interest expense, net, consists of interest on outstanding loans and the convertible promissory notes.
Income(loss) from and impairment on equity method investments
Entities over which we have the ability to exercise significant influence but do not have a controlling interest through investment in common shares, or in-substance common
shares, are accounted for using the equity method. Under the equity method, we initially record our investment at cost and subsequently recognize our proportionate share of each such entity’s net income or loss after the date of investment into
the statements of operations and comprehensive loss and accordingly adjust the carrying amount of the investment. When our share of losses in the equity of such entity equals or exceeds our interest in the equity of such entity, we do not
recognize further losses, unless we have incurred obligations or made payments or guarantees on behalf of such entity. An impairment charge is recorded when the carrying amount of the investment exceeds its fair value and this condition is
determined to be other-than-temporary. The adjusted carrying amount of the assets become new cost basis.
Key Operating Metrics
We prepare and analyze operating and financial data to assess the performance of our business and allocate our resources. The following table sets forth our key performance
indicators for the three months ended March 31, 2023 and 2022,.
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|
Three Months ended March 31,
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|
|
|
|
|
|
|
|
(Expressed in U.S. Dollars)
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|
(Unaudited)
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|
Gross margin of vehicle sales
|
|
|
1.63
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%
|
|
|
19.7
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%
|
Gross margin of vehicle sales. Gross margin of vehicle sales is defined as gross profit of vehicle sales divided by total revenue of vehicle sales.
Results of Operations
The following table sets forth a summary of our statements of operations for the periods indicated:
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Three Months ended March 31,
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2023
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|
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2022
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(Expressed in U.S. Dollars)
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|
(Unaudited)
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|
Combined Statements of Operations Data:
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|
|
|
|
|
|
Net revenues
|
|
|
3,470,544
|
|
|
|
1,830,633
|
|
Cost of goods sold
|
|
|
(3,275,800
|
)
|
|
|
(1,467,603
|
)
|
Gross profit/(loss)
|
|
|
194,744
|
|
|
|
363,030
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
Selling and marketing expenses
|
|
|
(1,868,985
|
|
|
|
(1,095,108
|
)
|
General and administrative expenses
|
|
|
(7,333,895
|
)
|
|
|
(8,211,831
|
)
|
Research and development expenses
|
|
|
(1,569,919
|
)
|
|
|
(425,359
|
)
|
Impairment of PPE
|
|
|
(24,369
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)
|
|
|
-
|
|
Total operating expenses
|
|
|
(10,797,168
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)
|
|
|
(9,732,298
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)
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|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(10,602,424
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)
|
|
|
(9,369,268
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)
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|
|
|
|
|
|
|
|
|
Other Income (Expense):
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
(54,415
|
)
|
|
|
64,201
|
|
|
|
|
|
|
|
|
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|
(Loss) Income from equity method investments
|
|
|
19,042
|
|
|
|
5,937
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|
Other (expense) income, net
|
|
|
358,075
|
|
|
|
(49,239
|
)
|
Loss on redemption of convertible promissory notes
|
|
|
(2,100
|
)
|
|
|
-
|
|
Loss on exercise of warrants
|
|
|
(212,870
|
)
|
|
|
-
|
|
Change in fair value of convertible promissory notes and derivative liability
|
|
|
(126,272
|
)
|
|
|
-
|
|
Change in fair value of equity securities
|
|
|
653,016
|
|
|
|
-
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Impairment of Long-term investments
|
|
|
(1,146,128
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)
|
|
|
-
|
|
Loss before income taxes
|
|
|
(11,113,977
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)
|
|
|
(9,348,369
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)
|
Income tax expense
|
|
|
—
|
|
|
|
—
|
|
Net loss
|
|
|
(11,113,977
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)
|
|
|
(9,348,369
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)
|
Less: net loss attributable to non-controlling interests
|
|
|
(156,028
|
)
|
|
|
(36,719
|
)
|
Net loss attributable to shareholders of the Company
|
|
|
(10,957,949
|
)
|
|
|
(9,311,650
|
)
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Comparison of the Three Months Ended March 31, 2023 and 2022
Net Revenues
The following table presents our net revenue components by amount and as a percentage of the total net revenues for the periods presented.
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|
Three Months Ended March 31,
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|
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2023
|
|
|
2022
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|
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Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
(Expressed in U.S. Dollars)
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|
(Unaudited)
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|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Vehicle Sales
|
|
$
|
2,840,963
|
|
|
|
81.9
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%
|
|
$
|
1,718,371
|
|
|
|
93.9
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%
|
Spare-part sales
|
|
|
598,036
|
|
|
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17.2
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%
|
|
|
101,424
|
|
|
|
5.5
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%
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Other sales
|
|
|
31,545
|
|
|
|
0.9
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%
|
|
|
10,838
|
|
|
|
0.6
|
%
|
Total net revenues
|
|
$
|
3,470,544
|
|
|
|
100.00
|
%
|
|
$
|
1,830,633
|
|
|
|
100.00
|
%
|
Net revenues for the three months ended March 31, 2023 were approximately $3.5 million, an increase of approximately $1.6 million or 89.6% from approximately $1.8 million for
the three months ended March 31, 2022. The increase in net revenues in 2023 was primarily attributed to an increase in vehicle sales by approximately $1.1 million due to the improvement of average selling price from approximately $11,380 to
$22,000 and an increase in spare-part sales by approximately $0.5 million.
For the three months ended March 31, 2023, we sold 129 ECVs, including 17 fully assembled Metro® units, 48 fully
assembled Logistar™ 200, 39 fully assembled Logistar™ 100, one fully assembled Teemak™ and 24 fully assembled Logistar™ 260, compared with 151 ECVs for the three months ended March 31, 2022, including 40 fully assembled Metro® vehicle units, 48 vehicle kits, 62 fully assembled Logistar™ 200 units and one fully assembled Neibor® 150 unit.
Geographically, the vast majority of our net revenues were generated from vehicle sales in the European Union during the three months ended March 31, 2023 and 2022.
For the three months ended March 31, 2023, net revenues from Europe, North America, and Asia (including China) as a percentage of total revenues was 88.2%, 0.9%, and 10.9%, respectively, compared to
33.7%, 22.8%, and 43.5%, respectively for the corresponding period in 2022.
For the three months ended March 31, 2023, net revenues from vehicle sales in Europe, North America, and Asia (including China) as a percentage of total vehicle net revenues
was 93.8%, 1.1%, and 5.1%, respectively, compared to 35.3%, 24.2%, and 40.5%, respectively, for the corresponding period in 2022.
Cost of goods sold
The following table presents our cost of goods sold by amount and as a percentage of the total cost of goods sold for the periods presented.
|
|
Three Months Ended March 31,
|
|
|
|
2023
|
|
|
2022
|
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
(Expressed in U.S. Dollars)
|
|
(Unaudited)
|
|
Cost of goods sold:
|
|
|
|
|
|
|
|
|
|
|
|
|
Vehicle Sales
|
|
$
|
(2,794,761
|
)
|
|
|
85.3
|
%
|
|
$
|
(1,379,605
|
)
|
|
|
94.0
|
%
|
Spare-part sales
|
|
|
(464,224
|
)
|
|
|
14.2
|
%
|
|
|
(98,024
|
)
|
|
|
6.7
|
%
|
Other sales
|
|
|
(16,814
|
)
|
|
|
0.5
|
%
|
|
|
10,025
|
|
|
|
-0.7
|
%
|
Inventory write-down
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total cost of goods sold
|
|
$
|
(3,275,799
|
)
|
|
|
100.00
|
%
|
|
$
|
(1,467,603
|
)
|
|
|
100.00
|
%
|
Cost of goods sold for the three months ended March 31, 2023 was approximately $3.3 million, an increase of approximately $1.8 million or approximately 123.2% from
approximately $1.5 million for the three months ended March 31, 2022. The increase of cost of vehicle sales was mainly caused by the increased per vehicle cost of Logistar® 200 model, and the increase of per vehicle cost of the Metro® model
with additional features were sold during the year 2022. The increase cost per vehicle was also partly attributable to the additional ocean shipping between continents, as the Company shift from recognizing revenue with FOB terms to recording
revenue on local direct pricing in the European and the US market which covered ocean shipping.
Gross Profit/(Loss)
Gross loss for the three months ended March 31, 2023 was approximately $0.2 million, a decrease of approximately $0.2 million from approximately $0.4 million of gross profit
for the three months ended March 31, 2022. For the three months ended March 31, 2023 and 2022, our overall gross margin was approximately 5.6% and 19.8%, respectively. Our gross margin of vehicle sales for the three months ended March 31, 2023
and 2022 was 1.63% and 19.7%, respectively. The decrease of our gross profit was caused by (i) the realized gross margin of our new model Logsitar®200 expending its market in Europe in 2023 was approximately 3.5% compared to a gross margin of
approximately 12.7% in the same period of 2022. The company adopts a competitive pricing strategy for Logsitar®200 to gain market acceptance. (ii) Our newly introduced model LS100, LS260, and Teemak which only began testing the market in 2023
earned negative gross margins of approximately 3.6%, 8.4% and 8.2%, respectively.
Selling and Marketing Expenses
Selling and marketing expenses for the three months ended March 31, 2023 were approximately $1.9 million, an increase of approximately $0.8 million or approximately 70.7% from
approximately $1.1 million for the three months ended March 31, 2022. The increase in selling and marketing expenses in 2023 was primarily attributed to the increase in salary expenses and share-based compensations of approximately $0.5 million
and $0.2 million respectively.
General and Administrative Expenses
General and administrative expenses for the three months ended March 31, 2023 were approximately $7.3 million, a decrease of approximately $0.9 million or approximately 10.7%
from approximately $8.2 million for the three months ended March 31, 2022. The decrease in general and administrative expenses in 2023 was primarily attributed to a decrease in others of approximately $2.4 million, which mainly consists of
one-off fees of approximately $1.8 million related to the divestment of FOH, offset by the increase in share-based compensation and office expenses of approximately $0.7 million and $0.8 million respectively.
Research and Development Expenses
Research and development expenses for the three months ended March 31, 2023 were approximately $1.6 million, an increase of approximately $1.1 million or approximately 269.1%
from approximately $0.4 million for the three months ended March 31, 2022. The increase in research and development expenses in 2023 was primarily attributed to the increase in design and development expenditures and salary expense of
approximately $0.5 million and $0.6 million respectively.
Interest income (expense), net
Interest expense, net, mainly consists of interest on convertible bonds. Net interest expense was approximately $0.05 million for the three months ended
March 31, 2023, an increase of approximately $0.1 million or approximately 184.8% compared to the approximately $0.06 million in interest income for the three months ended March 31, 2022. The increase was primarily attributable to (i) an
increase in interest expense to convertible bonds of approximately $0.4 million (ii) offset by the increase in interest income of approximately $0.2 million from bank deposit and $0.1 million from HWE. Loans from related parties and third
parties were fully settled as of April 13, 2023.
Other income (expense), net
Other income, net for the three months ended March 31, 2023 was approximately $0.4 million, representing a change of approximately $0.4 million compared to approximately $0.05
million of other expense, net for the three months ended March 31, 2022. The change of other income in 2023 compared to 2022 was primarily attributable to (i) an increase of approximately $0.2 million in investment income from the Company’s
fund investments and invested financial products during the first quarter in 2023, (ii) an increase of approximately $0.1 million in gains on foreign currency exchange, and (iii) an increase of approximately $0.1 million in subsidy income from
the government.
Change in fair value of convertible promissory notes and derivative liability
A loss in the change in fair value of convertible promissory notes and derivative liability for the three months ended March 31, 2023 was approximately $0.1 million. The
increased liability derived from fair value change was primarily caused by the continuing underperformance of the Company’s stock price, which increased the probability of exercising the mandatory redemption rights of the Company’s convertible
promissory notes and cashless exercising the warrants.
Change in fair value of equity securities
A gain in the change in fair value of equity securities for the three months ended March 31, 2023 was approximately $0.7 million. The gain was attributed to an upward
adjustment of approximately $0.4 million due to the fair value change of our investment on participating shares in Micro Money Fund SPC with an original investment value of $5 million and an upward adjustment of approximately $0.3 million from
our investment on partnership shares in MineOne Fix Income Investment I L.P with an original investment value of $25 million.
Non-GAAP Financial Measures
Adjusted EBITDA for the Three Months Ended March 31, 2023 and 2022
In addition to our results determined in accordance with GAAP, we believe Adjusted EBITDA, a non-GAAP measure is useful in evaluating operational performance. We use Adjusted
EBITDA to evaluate ongoing operations and for internal planning and forecasting purposes. We believe that non-GAAP financial information, when taken collectively, may be helpful to investors in assessing operating performance.
Adjusted EBITDA is a supplemental measure of our performance that is not required by, or presented in accordance with, GAAP. Adjusted EBITDA is not a measurement
of our financial performance under GAAP and should not be considered as an alternative to net income or any other performance measure derived in accordance with GAAP. We define Adjusted EBITDA as net income (or net loss) before net interest
expense, income tax expense, depreciation and amortization as further adjusted to exclude the impact of stock-based compensation expense and other non-recurring expenses including expenses related to TME Acquisition, expenses related to
one-off payment inherited from the original Naked Brand Group, impairment of goodwill, convertible bond issuance fee, loss on redemption of convertible promissory notes, loss on exercise of warrants, and change in fair value of
convertible promissory notes and derivative liability.
We present Adjusted EBITDA because we consider it to be an important supplemental measure of our performance and believe it is frequently used by securities analysts,
investors, and other interested parties in the evaluation of companies in our industry. Management believes that investors’ understanding of our performance is enhanced by including this non-GAAP financial measure as a reasonable basis for
comparing our ongoing results of operations. Management uses Adjusted EBITDA:
|
• |
as a measurement of operating performance because it assists us in comparing the operating performance of our business on a consistent basis, as it removes the impact of items not directly resulting from our core operations;
|
|
• |
for planning purposes, including the preparation of our internal annual operating budget and financial projections;
|
|
• |
to evaluate the performance and effectiveness of our operational strategies; and
|
|
• |
to evaluate our capacity to expand our business.
|
By providing this non-GAAP financial measure, together with the reconciliation, we believe we are enhancing investors’ understanding of our business and our results of
operations, as well as assisting investors in evaluating how well we are executing our strategic initiatives. We caution investors that amounts presented in accordance with our definition of Adjusted EBITDA may not be comparable to similar
measures disclosed by our competitors because not all companies and analysts calculate Adjusted EBITDA in the same manner. Adjusted EBITDA has limitations as an analytical tool, and should not be considered in isolation, or as an alternative to,
or a substitute for net income or other financial statement data presented in our financial statements as indicators of financial performance. Some of the limitations are:
|
• |
such measures do not reflect our cash expenditures;
|
|
• |
such measures do not reflect changes in, or cash requirements for, our working capital needs;
|
|
• |
although depreciation and amortization are recurring, non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future and such measures do not reflect any cash requirements for such
replacements; and
|
|
• |
the exclusion of stock-based compensation expense, which has been a significant recurring expense and will continue to constitute a significant recurring expense for the foreseeable future, as equity awards are expected to continue to
be an important component of our compensation strategy.
|
Due to these limitations, Adjusted EBITDA should not be considered as a measure of discretionary cash available to us to invest in the growth of our business. We compensate
for these limitations by relying primarily on our GAAP results and using these non-GAAP measures only supplementally. As noted in the table below, Adjusted EBITDA includes adjustments to exclude the impact of stock-based compensation expense and
material infrequent items. It is reasonable to expect that these items will occur in future periods. However, we believe these adjustments are appropriate because the amounts recognized can vary significantly from period to period, do not
directly relate to the ongoing operations of our business and may complicate comparisons of our internal operating results and operating results of other companies over time. In addition, Adjusted EBITDA may include adjustments for other items
that we do not expect to regularly occur in future reporting periods. Each of the normal recurring adjustments and other adjustments described in this paragraph and in the reconciliation table below help management with a measure of our core
operating performance over time by removing items that are not related to day-to-day operations.
The following table reconciles Adjusted EBITDA to the most directly comparable GAAP financial performance measure, which is net loss:
|
|
Three Months Ended March 31,
|
|
|
|
2023
|
|
|
2022
|
|
(Expressed in U.S. Dollars)
|
|
(Unaudited)
|
|
Net loss
|
|
$
|
(11,113,977
|
)
|
|
$
|
(9,348,369
|
)
|
Interest expense, net
|
|
|
54,415
|
|
|
|
(64,201
|
)
|
Income tax expense
|
|
|
—
|
|
|
|
—
|
|
Depreciation and amortization
|
|
|
330,632
|
|
|
|
140,430
|
|
Share-based compensation expense
|
|
|
1,153,808
|
|
|
|
199,416
|
|
Loss on redemption of convertible promissory notes
|
|
|
2,001
|
|
|
|
-
|
|
Loss on exercise of warrants
|
|
|
212,870
|
|
|
|
|
|
Change in fair value of convertible promissory notes and derivative liability
|
|
|
126,272
|
|
|
|
-
|
|
Expenses related to one-off payment inherited from the original Naked Brand Group
|
|
|
|
|
|
|
8,299,178
|
|
Adjusted EBITDA
|
|
$
|
(9,233,979
|
)
|
|
$
|
(773,546
|
)
|
B. Liquidity and Capital Resources
We have historically funded working capital and other capital requirements primarily through bank loans, equity financings and short-term loans. Also, the reverse
recapitalization we have completed at the end of December 2021 provided significant funding for the Company’s operations. Cash is required primarily to purchase raw materials, repay debts and pay salaries, office expenses and other operating
expenses.
As of March 31, 2023, we had approximately $91.8 million in cash and cash equivalents and approximately $2.7 million of accounts receivables as compared to
approximately $203.5 million in cash and cash equivalents and $2.4 million in accounts receivable as of March 31, 2022. For the three months ended March 31, 2023 and 2022, net cash used in operating activities was approximately $17.4 million and $23.5 million, respectively.
Short-Term Liquidity Requirements
We believe our cash and cash equivalents will be sufficient for us to continue to execute our business strategy over the twelve months period following the date
of issuance of our annual report. Our current business strategy for the next twelve months includes (i) the continued rollout of our new ECV models in North America and Europe, as applicable, (ii)
the establishment of local assembly facilities in the United States and the European Union and (iii) additional plants and equipment for the expansion of our Changxing factory. Actual results could vary materially as a result of a number of
factors, including:
|
• |
The costs of bringing our new facilities into operation;
|
|
• |
The timing and costs involved in rolling out new ECV models to market;
|
|
• |
Our ability to manage the costs of manufacturing our ECVs;
|
|
• |
The costs of maintaining, expanding and protecting our intellectual property portfolio, including potential litigation costs and liabilities;
|
|
• |
Revenues received from sales of our ECVs;
|
|
• |
The costs of additional general and administrative personnel, including accounting and finance, legal and human resources, as well as costs related to litigation, investigations, or settlements;
|
|
• |
Our ability to collect future revenues; and
|
|
• |
Other risks discussed in the section titled “Risk Factors.”
|
For the twelve months from the date hereof, we also plan to continue implementing measures to increase revenues and control operating costs and expenses, implementing
comprehensive budget controls and operational assessments, implementing enhanced vendor review and selection processes as well as enhancing internal controls.
Long-Term Liquidity Requirements
In the long-term, we plan to regionalize the manufacturing and supply chain relating to certain components of our ECVs in the geographic markets in which our ECVs are sold. In
the long-term, through our supply chain development know-how, we intend to establish supply chain relationships in North America and the European Union to support anticipated manufacturing and assembly needs in these markets, thereby reducing
the time in transit and potentially other landed costs elements associated with importing our components and spare parts from China. Currently, the majority of our revenues is derived from the sale of ECVs by private label channel partners that
assemble our vehicle kits in their own facilities. As part of our growth strategy, we plan to expand our channel partner network, and local assembly facilities to regionalize our manufacturing and supply chains to better serve our global
customers especially to expand our after-sales-market services offerings.
We intend to further expand our technology through continued investment in research and development. Since inception in 2013 through March 31, 2023, we have
spent over approximately $83.1 million in research and development activities related to our operations. We plan to increase our research and development expenditure over the long term as we build on
our technologies in vehicle development, driving control, cloud-based platforms, and innovations for promoting sustainable energy.
For our long-term business plan, we plan to fund current and future planned operations mainly through cash on hand, cash flow from operations, lines of credit and additional
equity and debt financings to the extent available on commercially favorable terms.
Working Capital
As of March 31, 2023, our working capital was approximately $117.2 million, as compared to a working capital of approximately $233.2 million as of March 31, 2022. The
approximately $116.0 million decrease in working capital during 2023 was primarily due to (i) the decrease of cash and cash equivalents and prepayment and other current assets of approximately $111.6 million and $1.9 million respectively,
offset by the increase in inventories and convertible bonds of approximately $16.3 million and $17.9 million respectively and (ii) a decrease in accounts and notes payable of approximately $1.8 million.
Cash Flow
|
|
Quarter Ended March 31,
|
|
|
|
2023
|
|
|
2022
|
|
(Expressed in U.S. Dollars)
|
|
(Unaudited)
|
|
Net cash used in operating activities
|
|
$
|
(17,363,332
|
)
|
|
$
|
(23,486,437
|
)
|
Net cash (used in) provided by investing activities
|
|
|
(5,493,759
|
)
|
|
|
(3,972,528
|
)
|
Net cash provided by financing activities
|
|
|
(39,583,321
|
)
|
|
|
(30,234,533
|
)
|
Effect of exchange rate changes on cash
|
|
|
283,807
|
|
|
|
97,755
|
|
Net (decrease) increase in cash, cash equivalents, and restricted cash
|
|
|
(62,156,605
|
)
|
|
|
(57,595,743
|
)
|
Cash and cash equivalents, and restricted cash at beginning of the year
|
|
|
154,096,801
|
|
|
|
261,664,962
|
|
Cash and cash equivalents, and restricted cash at end of the period
|
|
$
|
91,940,195
|
|
|
$
|
204,069,218
|
|
Operating Activities
Our net cash used in operating activities was approximately $17.4 million, $23.5 million for the three months ended
March 31, 2023 and 2022, respectively.
Net cash used in operating activities for the three months ended March 31, 2023 was primarily attributable to (i) our net loss of approximately $11.1 million and adjusted for
non-cash items of approximately $3.3 million, which primarily consisted of impairment of long-term investments, share based compensation expense, depreciation and amortization and amortization of operating lease right-of-use asset of
approximately $1.1 million, $1.2 million, $0.3 million and $0.7 million, respectively, (ii) the increase in inventories, accounts receivable, accrued expense and other current liabilities and operating lease liabilities and of approximately $4.5
million, $2.2 million, $1.5 million and $0.7 million, respectively, (iii) decrease in accounts payable of $0.7 million.
Investing Activities
Net cash used in investing activities was approximately $5.5 million for the three months ended March 31, 2023. Net cash used in investing activities for the three
months ended March 31, 2023 was primarily attributable to cash paid purchase for land use rights and property of approximately $0.3 million, additions in long-term investments as a minority interest of approximately $0.6 million, approximately
$2.6 million in purchase of plant and equipment and approximately $1.9 million net cash paid in acquisition of 35% of CAE's share and including related expenses.
Financing Activities
Net cash provided by financing activities was approximately $39.6 million for the three months ended March 31, 2023. Net cash provided by financing activities for the three
months ended March 31, 2023 was primarily attributable to approximately $39.6 million paid due to redemption of convertible bonds.
Contractual Obligations
In February 2021, we signed a non-cancellable operating lease agreement for warehouse and trial production use in Freehold, New Jersey (Willowbrook Road) of approximately 9,750
square feet. The lease period began in February 2021 and ends in January 2025. The annual base rent for this facility is $175,500 starting from February 2023. The lease rent fee will be adjusted upward by 3% annually afterwards.
In June 2021, we signed two non-cancellable operating lease agreements for approximately 11,700 square feet and 3,767 square feet, respectively, of two floors of an office
building in Hangzhou, China. The lease period for each lease agreement began in June 2021 and ends in May 2025. Pursuant to each agreement, we paid the first six months of our rent obligations in June 2021 and thereafter will be obligated to
make rental payments in advance semi-annually. The total annual base rent under these two lease agreements is $170,617 for the term ending May 2022 and $186,866 for the term ending May 2023.
On December 4, 2021, we entered into an entrustment agreement with Cedar Europe GmbH, a company organized under the laws of Germany (“Cedar”) pursuant to which we entrusted
Cedar to, in Cedar’s name, obtain a lease agreement for facilities in Germany and operate such lease facility under Cedar’s name in exchange for the Cenntro’s responsibility for all expenditures and costs of the lease. On December 24, 2021,
Cedar entered into a lease agreement for an approximately 27,220 square feet facility in Dusseldorf, Germany, where we now house our European Operations Facility. The lease period began on January 1, 2022 and ends on December 31, 2024. Pursuant
to such lease agreement, the total annual base rent is €238,800 (or approximately $210,991) for the lease term.
On January 20, 2022, we entered into an operating lease agreement (the “Jacksonville Lease”), between CAC, as tenant, the Company, as guarantor, and JAX Industrial One, LTD., a Florida limited
liability company, as landlord, for a facility of approximately 100,000 square feet in Jacksonville, Florida. The lease period commenced on January 20, 2022 and ends 120 months following a five-month rent abatement period. Pursuant to the
Jacksonville Lease, minimum annual rent is approximately $695,000, $722,800, and $751,710, for the first three years, sequentially, and rising thereafter.
On January 20, 2023, we signed a non-cancellable operating lease agreement for approximately 2,691 square feet as a headquarters and service center in Dominica Republic. The
lease period commenced on February 15, 2023 and ends five years. The rent is $9,000 per month and the annual increase is 5%.
On February 14, 2023, we signed a non-cancellable operating lease agreement for approximately 27,222 square feet for the production in Germany and other European
regions in Dusseldorf, Germany. The lease period for lease agreement began on February 14, 2023 and ends three years, we renewed for two years in advance. The monthly rent is €19,900 (or approximately
$21,352.7) and the annual increase depends on the consumer price index.
On March 22, 2023, we signed a non-cancellable operating lease agreement for approximately 26,579 square feet as a local plant in Colombia, the lease period began on May 1, 2023
and the lease term is two years. The rent is COP 39,324,371 (or approximately $8,265.0) per month and the value of the lease fee shall be readjusted in a proportion equal to the consumer price index (CPl) certified by DANE as of December 31 of
the immediately preceding year, plus two (2) points.
We have not entered into any off-balance sheet financial guarantees or other off-balance sheet commitments to guarantee the payment obligations of any third parties. We have not
entered into any derivative contracts that are indexed to our shares and classified as shareholders’ equity or that are not reflected in our Audited Financial Statements. Furthermore, 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 product development services with us.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with U.S. GAAP requires our management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated and combined financial statements, the reported amounts of revenue and expenses during the reporting period and the related disclosures in the
consolidated and combined financial statements and accompanying footnotes. Out of our significant accounting policies, which are described in “Note 2—Summary of Significant Accounting Policies” of our consolidated and combined financial
statements for the three months ended March 31, 2023, included elsewhere in this Annual Report, certain accounting policies are deemed “critical,” as they require management’s highest degree of judgment, estimates and assumptions. While
management believes its judgments, estimates and assumptions are reasonable, they are based on information presently available and actual results may differ significantly from those estimates under different assumptions and conditions.
Basis of presentation
The accompanying consolidated balance sheet as of December 31, 2022, which has been derived from audited financial statements, and the unaudited condensed consolidated financial
statements as of March 31, 2023 and for the three months ended March 31, 2023 and 2022 have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”).
Certain information and disclosures, which are normally included in financial statements prepared in accordance with accounting principles generally accepted in the United
States of America (“U.S. GAAP”), have been condensed or omitted pursuant to such rules and regulations. Management believes that the disclosures made are adequate to provide a fair presentation. The interim financial information should be read
in conjunction with the financial statements and the notes for the fiscal year ended December 31, 2022. The results of operations for the three months ended March 31, 2023 are not necessarily indicative of the results for the full year or any
future periods
The preparation of financial statements in conformity with U.S. GAAP requires the Company’s management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated and combined financial statements, and the reported amounts of revenue and expenses during the reporting period. The Company
continually evaluates these estimates and assumptions based on the most recently available information, historical experience and various other assumptions that the Company believes to be reasonable under the circumstances. Significant
accounting estimates reflected in the Company’s consolidated and combined financial statements include, but are not limited to, estimates and judgments applied in determination of provision for doubtful accounts, lower of cost and net
realizable value of inventories, impairment losses for long-lived assets and investments, valuation allowance for deferred tax assets and fair value measurement for share-based compensation expense, convertible promissory notes and warrants.
Since the use of estimates is an integral component of the financial reporting process, actual results could differ from those estimates.
Fair value measurement
ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. The hierarchy prioritizes the inputs into three levels based on
the extent to which inputs used in measuring fair value are observable in the market. These tiers include:
Level 1—defined as observable inputs such as quoted prices in active markets;
Level 2—defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and
Level 3—defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions.
The Company’s financial instruments not reported at fair value primarily consist of cash and cash equivalents, restricted cash, accounts receivable, prepayments and other
current assets, amount due from and due to related parties, accounts payable and accrued expenses and other current liabilities.
The carrying value of cash and cash equivalents, restricted cash, accounts receivable, prepayment and other current assets, accounts payable, accrued expenses and other current
liabilities and amount due from and due to related party, current approximate fair value because of the short-term nature of these items. The estimated fair values of loan from third party, and amount due from related party, non-current were
not materially different from their carrying value as presented due to the brief maturities and because the interest rates on these borrowings approximate those that would have been available for loans of similar remaining maturities and risk
profiles.
The fair value option provides an election that allows a company to irrevocably elect to record certain financial assets and liabilities at fair value on an
instrument-by-instrument basis at initial recognition. The Company has elected to apply the fair value option to convertible promissory notes due to the complexity of the various conversion and settlement options available to notes holders.
The convertible promissory notes accounted for under the fair value option election are each a debt host financial instrument containing embedded features that would otherwise
be required to be bifurcated from the debt-host and recognized as separate derivative liabilities subject to initial and subsequent periodic estimated fair value measurements in accordance with GAAP. Notwithstanding, when the fair value option
election is applied to financial liabilities, bifurcation of an embedded derivative is not required, and the financial liability is initially measured at its issue-date estimated fair value and then subsequently remeasured at estimated fair
value on a recurring basis as of each reporting period date.
The portion of the change in fair value attributed to a change in the instrument-specific credit risk is recognized as a component of other comprehensive income and the
remaining amount of the fair value adjustment is recognized as changes in fair value of convertible promissory notes and derivative liabilities in the Company’s consolidated statement of operations. The estimated fair value adjustment is
presented in a respective single line item within other income (expense) in the consolidated statement of operations because the change in fair value of the convertible notes was not attributable to instrument-specific credit risk.
In connection with the issuances of convertible promissory notes, the Company issued investor warrants and placement agent warrants to purchase ordinary shares of the Company.
The Company utilizes a Binomial model to estimate the fair value of the warrants and are considered a Level 3 fair value measurement. The warrants are measured at each reporting period, with changes in fair value recognized in the statement of
operations.
As a practical expedient, the Company uses Net Asset Value (“NAV”) or its equivalent to measure the fair value of its certain fund investment. The Company’s investments valued
at NAV as a practical expedient are private equity funds, which represent the investment in equity securities on the consolidated balance sheet.
Business combination
The Company accounts for its business combinations using the acquisition method of accounting in accordance with ASC 805 “Business Combinations.” The cost of an acquisition is
measured as the aggregate of the acquisition date fair value of the assets transferred to the sellers, liabilities incurred by the Company and equity instruments issued by the Company. Transaction costs directly attributable to the acquisition
are expensed as incurred. Identifiable assets acquired and liabilities assumed are measured separately at their fair values as of the acquisition date, irrespective of the extent of any noncontrolling interests. The excess of (i) the total
costs of acquisition, fair value of the noncontrolling interests and acquisition date fair value of any previously held equity interest in the acquiree over (ii) the acquisition date amounts of the identifiable net assets of the acquiree is
recorded as goodwill.
Cash and cash equivalents and restricted cash
The Company considers highly liquid investments purchased with original maturities of three months or less to be cash equivalents.
Restricted cash consists of cash restricted as to withdrawal or use. Such restricted cash relates to certain credit card and lease guarantees.
Revenue recognition
We adopted ASC Topic 606 Revenue from Contracts with Customers with a date of the initial application of January 1, 2018 using the modified retrospective method.
We recognize revenue when goods or services are transferred to customers in an amount that reflects the consideration which we expect to receive in exchange for those goods. In
determining when and how revenue is recognized from contracts with customers, we perform the following five-step analysis: (i) identification of a contract with the customer; (ii) determination of performance obligations; (iii) measurement of
the transaction price; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) we satisfy each performance obligation.
We generate revenue primarily through sales of light-duty ECVs, sales of ECV parts, and sales of off-road electric vehicles. Revenue is recognized at a point in time once we
have determined that the customer has obtained control over the product. Control is typically deemed to have been transferred to the customer when the performance obligation is fulfilled, usually at the time of delivery, at the net sales price
(transaction price). Revenue is recognized net of any taxes collected from customers, which are subsequently remitted to governmental authorities. Shipping and handling costs for product shipments occur prior to the customer obtaining control
of the goods are accounted for as fulfilment costs rather than separate performance obligations and recorded as sales and marketing expenses.
Shipping and handling costs for product shipments occur prior to the customer obtaining control of the goods are accounted for as fulfilment costs rather than separate
performance obligations and recorded as sales and marketing expenses.
Cost of goods sold
Cost of goods sold mainly consists of production related costs including costs of raw materials, consumables, direct labor, overhead costs, depreciation of property, plant and
equipment, manufacturing waste treatment processing fees and inventory write-downs.
Government grants
The Company’s PRC based subsidiaries received government subsidies from certain local governments. The Company’s government subsidies consist of specific subsidies and other
subsidies. Specific subsidies are subsidies that the local government has provided for a specific purpose, such as land fulfillment costs. Other subsidies are the subsidies that the local government has not specified its purpose for and are not
tied to future trends or performance of the Company, receipt of such subsidy income is not contingent upon any further actions or performance of the Company and the amounts do not have to be refunded under any circumstances.
Specific subsidies relating to land use rights are accounted for as an income with the subsidy benefit reflected over the related asset useful life. Other subsidies are
recognized as other income upon receipt as further performance by the Company is not required.
Accounts receivable and provision for doubtful accounts
Accounts receivable are recognized and carried at net realizable value. Provision for doubtful accounts is recorded for periods in which we determine a loss is probable, based
on its assessment of specific factors, such as troubled collections, historical experience, accounts aging, ongoing business relations and other factors. Account balances are charged off against the provision after all means of collection have
been exhausted and the potential for recovery is considered remote.
There is no provision for the three months ended March 31, 2023 and 2022.
Inventories
Inventories are stated at the lower of cost or net realizable value. The cost of raw materials is determined on the basis of weighted average. The cost of finished goods is
determined on the basis of weighted average and comprises direct materials, direct labor cost and an appropriate proportion of overhead. Net realizable value is based on estimated selling prices less selling expenses and any further costs of
completion. Adjustments to reduce the cost of inventory to net realizable value are made, if required, for estimated excess, obsolescence, or impaired balances. Write-downs are recorded in the consolidated and combined statements of operations
and comprehensive loss.
There is no inventories written down for the three months ended March 31, 2023 and 2022.
Investment in equity securities
For investments in equity securities with a variable interest rate indexed to the performance of underlying assets, the Company elected the fair value method at the date of
initial recognition and carried these investments subsequently at fair value. Changes in fair values are reflected in the consolidated statements of operations and comprehensive loss.
The Company determines the appropriate classification of its investments in equity securities at the time of purchase and reevaluates such determinations at each balance sheet
date. The private equity funds are measured at fair value with gains and losses recognized in earnings. As a practical expedient, the Company uses Net Asset Value (“NAV”) or its equivalent to measure the fair value of the Fund.
The Company evaluates whether an investment is other-than-temporarily impaired based on the specific facts and circumstances. Factors that are considered in determining whether
an other-than-temporary decline in value has occurred include the market value of the security in relation to its cost basis, the financial condition of the investee, and the intent and ability to retain the investment for a sufficient period
of time to allow for recovery in the market value of the investment.
Property, plant and equipment, net
Property, plant and equipment are carried at cost less accumulated depreciation and any impairment. Depreciation is calculated over the asset’s estimated useful life, using the
straight-line method. Leasehold improvements are amortized over the life of the asset or the term of the lease, whichever is shorter. Estimated useful lives are as follows:
Buildings
|
|
20 years
|
Machinery and equipment
|
|
5-10 years
|
Office equipment
|
|
5 years
|
Motor vehicles
|
|
3-5 years
|
Leasehold improvement
|
|
3-10 years
|
Others
|
|
3 years
|
The Company reassesses the reasonableness of the estimates of useful lives and residual values of long-lived assets when events or changes in circumstances indicate that the
useful lives and residual values of a major asset or a major category of assets may not be reasonable. Factors that the Company considers in deciding when to perform an analysis of useful lives and residual values of long-lived assets include,
but are not limited to, significant variance of a business or product line in relation to expectations, significant deviation from industry or economic trends, and significant changes or planned changes in the use of the assets. The analysis
will be performed at the asset or asset category with the reference to the assets’ conditions, current technologies, market, and future plan of usage and the useful lives of major competitors.
The costs and related accumulated depreciation of assets sold or otherwise retired are eliminated from the Company’s accounts and any gain or loss is included in the
consolidated and combined statements of operations and comprehensive loss. The cost of maintenance and repair is charged to expenses as incurred, whereas significant renewals and betterments are capitalized.
The Company constructs certain of its property including recodifications and improvement of its office buildings and plant. Depreciation is recorded at the time assets are ready
for the intended use.
Intangible assets, net
Intangible assets are carried at cost less accumulated amortization and any recorded impairment. Intangible assets are amortized using the straight-line approach over the
estimated economic useful lives of the assets as follows:
Category
|
Estimated useful life
|
Land use rights
|
45.75 years
|
Software
|
3 years
|
Impairment of long-lived assets
The Company evaluates the recoverability of long-lived assets or asset group with determinable useful lives whenever events or changes in circumstances indicate that an asset or
a group of assets’ carrying amount may not be recoverable. The Company measures the carrying amount of long-lived asset against the estimated undiscounted future cash flows expected to result from the use of the assets or asset group and their
eventual disposition. The carrying amount of the long-lived asset or asset group is not recoverable when the sum of the undiscounted expected future net cash flows is less than the carrying value of the asset being evaluated. Impairment loss is
calculated as the amount by which the carrying value of the asset exceeds its fair value. Fair value is generally determined by discounting the cash flows expected to be generated by the assets or asset group, when the market prices are not
readily available. The adjusted carrying amount of the assets become new cost basis and are depreciated over the assets’ remaining useful lives. Long-lived assets are grouped with other assets and liabilities at the lowest level for which
identifiable cash flows are largely independent of the cash flows of other assets and liabilities. The impairment test is performed at the asset group level. Impairment loss for long-lived assets of $1,170,497 and nil were recorded in the
Company’s consolidated and combined statements of operations and comprehensive loss for the three months ended March 31, 2023 and 2022, respectively.
Goodwill
Goodwill represents the future economic benefits arising from other assets acquired in a business combination. Goodwill acquired in a business combination is tested for
impairment at least annually or more frequently when events and circumstances occur indicating that the recorded goodwill may be impaired. The Company performs impairment analysis on goodwill as of December 31 every year either beginning with a
qualitative assessment, or starting with the quantitative assessment instead. The quantitative goodwill impairment test compares the fair values of each reporting unit to its carrying amount, including goodwill. A reporting unit constitutes a
business for which discrete profit and loss financial information is available. The fair value of each reporting unit is established using a combination of expected present value of future cash flows. If the fair value of each reporting unit
exceeds its carrying amount, goodwill is not considered to be impaired. If the carrying amount of a reporting unit exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess, limited to the total amount of
goodwill allocated to that reporting unit.
The Company adopted ASU No. 2017-14, simplifying the Test for Goodwill Impairment on January 1, 2022. The Company has the option to choose whether it will apply the qualitative
assessment first and then the quantitative assessment, if necessary, or to apply the quantitative assessment directly. If the Company chooses to apply a qualitative assessment first, it starts the goodwill impairment test by assessing
qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the Company determines that it is more likely than not the fair value of a reporting unit is less
than its carrying amount, the quantitative impairment test is mandatory. Otherwise, no further testing is required. The quantitative impairment test consists of comparison of the fair value of a reporting unit to its carrying amount.
Application of a goodwill impairment test requires significant management judgments, including the identification of reporting units, assigning assets and liabilities to
reporting units, assigning goodwill to reporting units, and determining the fair value of each reporting unit. The judgment in estimating the fair value of reporting units includes estimating future cash flows, determining appropriate discount
rates and making other assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value for each reporting unit.
There is no impairment loss for goodwill for the three months ended March 31, 2023 and 2022.
Investment in equity investees
Equity method investments, net
The Company had the following equity method investments:
|
|
March 31,
2023
|
|
|
December 31,
2022
|
|
Antric GmbH (1)
|
|
$
|
1,556,672
|
|
|
$
|
2,674,500
|
|
Hangzhou Entropy Yu Equity Investment Partnership (Limited Partnership) (“Entropy Yu”) (2)
|
|
|
2,199,016
|
|
|
|
2,189,570
|
|
Hangzhou Hezhe Energy Technology Co., Ltd. (“Hangzhou Hezhe”) (3)
|
|
|
391,088
|
|
|
|
367,272
|
|
Able 2rent GmbH (DEU) (4)
|
|
|
92,736
|
|
|
|
94,399
|
|
Total
|
|
$
|
4,239,512
|
|
|
$
|
5,325,741
|
|
|
(1) |
On December 16, 2022, the Company invested EUR2,500,000 (approximately $2,718,000) in Antric GmbH to acquire 25% of its equity interest. The Company accounts for the investment under the equity method
because the Company controls 25% of voting interests, and has the ability to exercise significant influence over Antric GmbH. For the three months ended March 31, 2023, the Company recorded impairment on investment of Antric GmbH of
$1,146,128.
|
|
(2) |
On September 25, 2022, the Company invested RMB15,400,000 (approximately $2,242,414) in Entropy Yu to acquire 99.355% of the partnership entity’s equity interest. The Company accounts for the investment
under the equity method because the Company controls 50% of voting interests in partnership matters and material matters must be agreed upon by all partners. The Company has the ability to exercise significant influence over Entropy Yu.
|
|
(3) |
On June 23, 2021, the Company invested RMB2,000,000 (approximately $291,223 in Hangzhou Hezhe to acquire 20% of its equity interest. The Company accounts for the investment under the equity method because
the Company controls 33% of voting interests in board of directors, and has the ability to exercise significant influence over Hangzhou Hezhe.
|
|
(4) |
On March 22, 2022, CAE invested EUR100,000 (approximately $108,720 in Able 2rent GmbH (DEU) to acquire 50% of its equity interest. The Company accounts for the investment under the equity method because
it does not have control over Able 2rent GmbH (DEU) as the Company does not participate in its operation and does not serve as member of board of director.
|
Equity investment without readily determinable fair value
|
|
March 31,
2023
|
|
|
December 31,
2022
|
|
HW Electro Co., Ltd. (1)
|
|
|
1,000,000
|
|
|
|
-
|
|
Total
|
|
$
|
1,000,000
|
|
|
$
|
-
|
|
|
(1) |
On January 31, 2023, the Company entered into a convertible debt agreement with HW Electro Co., Ltd., to convert the loan principal of $1,000,000 into 571,930 shares of HW Electro Co.,
Ltd.’s for a total of 3.59% of its equity interest.
|
Income taxes
The Company accounts for income tax using an asset and liability approach, which allows for the recognition of deferred tax benefits in future years. Under the asset and
liability approach, deferred income taxes are recognized for differences between the financial reporting and tax bases of assets and liabilities at enacted tax rates in effect for the years in which the differences are expected to reverse. The
accounting for deferred tax calculation represents management’s best estimate of the most likely future tax consequences of events that have been recognized in our financial statements or tax returns and related future anticipation. A valuation
allowance is recorded to reduce the deferred tax assets to an amount that is more likely than not to be realized after considering all available evidence, both positive and negative.
Current income taxes are provided for in accordance with the laws of the relevant taxing authorities. As part of the process of preparing financial statements, the Company is
required to estimate its income taxes in each of the jurisdictions in which it operates. The Company accounts for income taxes using the asset and liability method. Under this method, deferred income taxes are recognized for temporary
differences between the tax basis of assets and liabilities and their reported amounts in the financial statements. Net operating losses are carried forward and credited by applying enacted statutory tax rates applicable to future years when
the reported amounts of the asset or liability are expected to be recovered or settled, respectively. Deferred tax assets are reduced by a valuation allowance when, based upon the weight of available evidence, it is more likely than not that
some portion or all of the deferred tax assets will not be realized. The components of the deferred tax assets and liabilities are individually classified as non-current. The Company recognizes the tax benefit from an uncertain tax position
only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position.
As required by applicable tax law, interest on non-payment of income taxes and penalties associated with tax positions when a tax position does not meet the minimum statutory
threshold to avoid payment of penalties recognized, if any, will be classified as a component of the provisions for income taxes. The tax returns of the Company’s Hong Kong and PRC subsidiaries are subject to examination by the relevant local
tax authorities. According to the Departmental Interpretation and Practice Notes No.11 (Revised) of the Hong Kong Inland Revenue Ordinance (the “HK tax laws”), an investigation normally covers the six years of the assessment prior to the year
of the assessment in which the investigation commences. In the case of fraud and willful evasion, the investigation is extended to cover ten years of assessment. According to the PRC Tax Administration and Collection Law, the statute of
limitations is three years if the underpayment of taxes is due to computational errors made by the taxpayer or the withholding agent. The statute of limitations is extended to five years under special circumstances, where the underpayment of
taxes is more than RMB100,000. In the case of transfer pricing issues, the statute of limitation is ten years. There is no statute of limitation in the case of tax evasion. U.S. federal tax matters are open to examination for years 2014 through
2022. For the three months ended March 31, 2023 and 2022, the Company did not have any material interest or penalties associated with tax positions. The Company did not have any significant unrecognized uncertain tax positions as of March 31,
2023 or 2022. The Company does not expect that its assessment regarding unrecognized tax positions will materially change over the next 12 months.
Foreign currency translation and transaction
The consolidated and combined financial statements are presented in United States dollars (“USD” or “$”). The functional currency of certain of CEGL’s PRC subsidiaries is the
Renminbi (“RMB”). The functional currency of CEA is the EUR, and CEGL and its other subsidiaries outside of PRC is the USD.
Assets and liabilities are translated at the exchange rates as of balance sheet date. Income and expenditures are translated at the average exchange rate of the reporting
period. Capital accounts of the consolidated and combined financial statements are translated into USD from RMB at their historical exchange rates when the capital transactions occurred. Translation adjustments are reported as cumulative
translation adjustments and are shown as a separate component of accumulated other comprehensive loss in the balance sheets. The rates are obtained from H.10 statistical release of the U.S. Federal Reserve Board.
|
|
For the Three Months Ended March 31,
|
|
|
|
2023
|
|
|
2022
|
|
Period end USD: RMB exchange rate
|
|
|
6.8676
|
|
|
|
6.3393
|
|
Average USD: RMB exchange rate
|
|
|
6.8423
|
|
|
|
6.3478
|
|
Period end USD: EUR exchange rate
|
|
|
0.9198
|
|
|
|
0.9015
|
|
Average USD: EUR exchange rate
|
|
|
0.9320
|
|
|
|
0.8916
|
|
Foreign currency transactions denominated in currencies other than functional currency are translated into the functional currency using the exchange rates prevailing at the
dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are re-measured at the applicable rates of exchange in effect at that date. Foreign exchange gains and losses resulting from
the settlement of such transactions and from re-measurement at year-end are recognized in foreign currency exchange gain/loss, net on the consolidated and combined statement of operations.
Comprehensive loss
Comprehensive loss includes all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, all items that are
required to be recognized under current accounting standards as components of comprehensive loss are required to be reported in a financial statement that is presented with the same prominence as other financial statements. For the years
presented, comprehensive loss includes net loss and the foreign currency translation changes.
Segments
In accordance with ASC 280-10, Segment Reporting, the Company’s chief operating decision maker (“CODM”), identified as the Company’s Chief Executive Officer, relies upon the
consolidated and combined results of operations as a whole when making decisions about allocating resources and assessing the performance of the Company. As a result of the assessment made by CODM, the Company has only one reportable segment.
The Company does not distinguish between markets or segments for the purpose of internal reporting.
Share-based compensation expense
The Company’s share-based compensation expenses are recorded in accordance with ASC 718 and ASC 710.
Share-based awards to employees are measured based on the grant date fair value of the equity instrument issued and recognized as compensation expense net of a forfeiture rate
on a straight-line basis, over the requisite service period, with a corresponding impact reflected in additional paid-in capital.
The estimate of forfeiture rate will be adjusted over the requisite service period to the extent that the actual forfeiture rate differs, or is expected to differ, from such
estimates. Changes in estimated forfeiture rate will be recognized through a cumulative catch-up adjustment in the period of change.
Derivative liability
Warrants recorded as liabilities at fair value in accordance with ASC 480 “Distinguishing Liabilities from Equity”. The liability remeasured every reporting period with any
change to fair value recorded in the consolidated and combined statements of operations.
Operating lease
The Company adopted the new lease accounting standard, ASC Topic 842, Leases (“ASC 842”) as of January 1, 2019, using the non-comparative transition option pursuant to ASU
2018-11. The Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things (i) allowed the Company to carry forward the historical lease classification; (ii) did
not require the Company to reassess whether any expired or existing contracts are or contain leases and (iii) did not require the Company to reassess initial direct costs for any existing leases. Therefore, the Company did not consider its
existing land use right that was not previously accounted for as leases under Topic 840. For all operating leases except for short-term leases, the Company recognized operating right-of-use assets and operating lease liabilities. Leases with an
initial term of 12 months or less were short-term leases and not recognized as right-of-use assets and lease liabilities on the consolidated and combined balance sheets.
Right-of-use assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments
arising from the lease. Right-of-use assets and lease liabilities are recognized at the commencement date based on the present value of the remaining future minimum lease payments. As the interest rate implicit in the Company’s leases is not
readily determinable, the Company utilizes its incremental borrowing rate, determined by class of underlying asset, to discount the lease payments. The operating lease right-of-use assets also include lease payments made before commencement and
exclude lease incentives. Some of the Company’s lease agreements contained renewal options; however, the Company did not recognize right-of-use assets or lease liabilities for renewal periods unless it was determined that the Company was
reasonably certain of renewing the lease at inception or when a triggering event occurred. The Company’s lease agreements did not contain any material residual value guarantees or material restrictive covenants.
Non-controlling Interest
A non-controlling interest in subsidiaries represents the portion of the equity (net assets) in the subsidiaries not directly or indirectly attributable to the Company’s
shareholders. Non-controlling interests are presented as a separate component of equity on the consolidated balance sheets and consolidated and combined statements of operations and other comprehensive loss are attributed to controlling and
non-controlling interests.
Recently issued accounting standards pronouncements
In June 2016, the FASB issued Accounting Standards Update No. 2016-13, “Financial Instruments - Credit Losses (Topic 326)” (“ASU 2016-13”). ASU 2016-13 revises the methodology
for measuring credit losses on financial instruments and the timing of when such losses are recorded. Originally, ASU 2016-13 was effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019,
with early adoption permitted. In November 2019, FASB issued ASU 2019-10, “Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842).” ASU 2019-10 deferred the effective date of ASU 2016-13
for all other companies to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. In addition, the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”) provides that emerging growth
companies (“EGC”) can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. The Company currently qualifies as an EGC as defined in
the JOBS Act, and has adopted this standard beginning on January 1, 2023. The impact of adoption of ASU No. 2016-13 is not material on the Company’s consolidated and combined financial statements. 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” and issued subsequent amendment which refines the scope of the ASU and clarifies some of its guidance as part of the FASB’s
monitoring of global reference rate reform activities in January 2021 within ASU 2021-01 (collectively, including ASU 2020-04, “ASC 848”). ASC 848 provides optional expedients and exceptions for applying U.S. GAAP on contract modifications and
hedge accounting to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform, if certain criteria are met. These optional expedients and
exceptions provided in ASC 848 are effective for us from January 1, 2020 through December 31, 2022. The Company has elected the optional expedients for certain existing interest rate swaps that are designated as cash flow hedges, which did not
have a material impact on the consolidated and combined financial statements.
In October 2021, the FASB issued ASU 2021-08, which amends ASC 805 to “require acquiring entities to apply Topic 606 to recognize and measure contract assets and contract
liabilities in a business combination.” Under current GAAP, an acquirer generally recognizes such items at fair value on the acquisition date. According to the FASB, this update is intended “to improve the accounting for acquired revenue
contracts with customers in a business combination by addressing diversity in practice and inconsistency related to the following: a) Recognition of an acquired contract liability; b) Payment terms and their effect on subsequent revenue
recognized by the acquirer.” For public business entities, the amendments in this update are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. For all other entities, the
amendments are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. The amendments in this update should be applied prospectively to business combinations occurring on or after the
effective date of the amendments. The Company is currently evaluating the impact of this update on its consolidated and combined financial statements.
Other accounting pronouncements that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected
to have a material impact on the Company’s consolidated and combined financial statements upon adoption.
The following table reconciles the Company‘s balance sheet under U.S. GAAP with its balance sheet under IFRS as of 31 March 2023 and audited balance sheet as of 31 December 2022, respectively.
|
|
For the Periods Ended
|
|
|
|
Unaudited 31 March 2023
|
|
|
31 December 2022
|
|
Balance Sheet:
|
|
U.S. GAAP
|
|
|
IFRS
Difference
|
|
|
IFRS
|
|
|
U.S. GAAP
|
|
|
IFRS
Difference
|
|
|
IFRS
|
|
Current assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
91,847,734
|
|
|
|
-
|
|
|
|
91,847,734
|
|
|
|
153,966,777
|
|
|
|
-
|
|
|
|
153,966,777
|
|
Restricted cash
|
|
|
92,461
|
|
|
|
-
|
|
|
|
92,461
|
|
|
|
130,024
|
|
|
|
-
|
|
|
|
130,024
|
|
Accounts receivable, net
|
|
|
2,732,834
|
|
|
|
-
|
|
|
|
2,732,834
|
|
|
|
565,398
|
|
|
|
-
|
|
|
|
565,398
|
|
Inventories
|
|
|
36,546,917
|
|
|
|
-
|
|
|
|
36,546,917
|
|
|
|
31,843,371
|
|
|
|
-
|
|
|
|
31,843,371
|
|
Prepayment and other current assets
|
|
|
15,596,764
|
|
|
|
-
|
|
|
|
15,596,764
|
|
|
|
16,138,330
|
|
|
|
-
|
|
|
|
16,138,330
|
|
Deferred cost-current
|
|
|
20,026
|
|
|
|
-
|
|
|
|
20,026
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Amount due from related parties
|
|
|
343,353
|
|
|
|
-
|
|
|
|
343,353
|
|
|
|
366,936
|
|
|
|
-
|
|
|
|
366,936
|
|
Total current assets
|
|
|
147,180,089
|
|
|
|
-
|
|
|
|
147,180,089
|
|
|
|
203,010,836
|
|
|
|
-
|
|
|
|
203,010,836
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term investment, net
|
|
|
5,239,512
|
|
|
|
-
|
|
|
|
5,239,512
|
|
|
|
5,325,741
|
|
|
|
-
|
|
|
|
5,325,741
|
|
Investment in equity securities
|
|
|
30,412,211
|
|
|
|
-
|
|
|
|
30,412,211
|
|
|
|
29,759,195
|
|
|
|
-
|
|
|
|
29,759,195
|
|
Property, plant and equipment, net
|
|
|
17,265,446
|
|
|
|
-
|
|
|
|
17,265,446
|
|
|
|
14,962,591
|
|
|
|
-
|
|
|
|
14,962,591
|
|
Intangible assets, net
|
|
|
4,558,185
|
|
|
|
-
|
|
|
|
4,558,185
|
|
|
|
4,563,792
|
|
|
|
-
|
|
|
|
4,563,792
|
|
Right-of-use assets
|
|
|
13,865,063
|
|
|
|
-
|
|
|
|
13,865,063
|
|
|
|
8,187,149
|
|
|
|
-
|
|
|
|
8,187,149
|
|
Deferred cost- non-current
|
|
|
243,251
|
|
|
|
-
|
|
|
|
243,251
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other non-current assets, net
|
|
|
2,306,597
|
|
|
|
-
|
|
|
|
2,306,597
|
|
|
|
2,039,012
|
|
|
|
-
|
|
|
|
2,039,012
|
|
Total non-current assets
|
|
|
73,890,265
|
|
|
|
-
|
|
|
|
73,890,265
|
|
|
|
64,837,480
|
|
|
|
-
|
|
|
|
64,837,480
|
|
Total assets
|
|
|
221,070,354
|
|
|
|
-
|
|
|
|
221,070,354
|
|
|
|
267,848,316
|
|
|
|
-
|
|
|
|
267,848,316
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
2,899,119
|
|
|
|
-
|
|
|
|
2,899,119
|
|
|
|
3,383,021
|
|
|
|
-
|
|
|
|
3,383,021
|
|
Accrued expense and other current liabilities
|
|
|
3,668,415
|
|
|
|
-
|
|
|
|
3,668,415
|
|
|
|
5,048,641
|
|
|
|
-
|
|
|
|
5,048,641
|
|
Contractual liabilities
|
|
|
2,656,151
|
|
|
|
-
|
|
|
|
2,656,151
|
|
|
|
2,388,480
|
|
|
|
-
|
|
|
|
2,388,480
|
|
Operating lease liabilities, current
|
|
|
2,779,279
|
|
|
|
-
|
|
|
|
2,779,279
|
|
|
|
1,313,334
|
|
|
|
-
|
|
|
|
1,313,334
|
|
Convertible promissory notes
|
|
|
17,903,274
|
|
|
|
-
|
|
|
|
17,903,274
|
|
|
|
57,372,827
|
|
|
|
-
|
|
|
|
57,372,827
|
|
Deferred government grant, current
|
|
|
56,009
|
|
|
|
-
|
|
|
|
56,009
|
|
|
|
26,533
|
|
|
|
-
|
|
|
|
26,533
|
|
Amount due to related parties
|
|
|
46,900
|
|
|
|
-
|
|
|
|
46,900
|
|
|
|
716,372
|
|
|
|
-
|
|
|
|
716,372
|
|
Total current liabilities
|
|
|
30,009,147
|
|
|
|
-
|
|
|
|
30,009,147
|
|
|
|
70,249,208
|
|
|
|
-
|
|
|
|
70,249,208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred government grant, non-current
|
|
|
1,036,172
|
|
|
|
-
|
|
|
|
1,036,172
|
|
|
|
497,484
|
|
|
|
-
|
|
|
|
497,484
|
|
Derivative liability - investor warrant
|
|
|
12,392,632
|
|
|
|
-
|
|
|
|
12,392,632
|
|
|
|
14,334,104
|
|
|
|
-
|
|
|
|
14,334,104
|
|
Derivative liability - placement agent warrant
|
|
|
3,457,067
|
|
|
|
-
|
|
|
|
3,457,067
|
|
|
|
3,456,404
|
|
|
|
-
|
|
|
|
3,456,404
|
|
Operating lease liabilities, non-current
|
|
|
11,640,499
|
|
|
|
-
|
|
|
|
11,640,499
|
|
|
|
7,421,582
|
|
|
|
-
|
|
|
|
7,421,582
|
|
Total non-current liabilities
|
|
|
28,526,370
|
|
|
|
-
|
|
|
|
28,526,370
|
|
|
|
25,709,574
|
|
|
|
-
|
|
|
|
25,709,574
|
|
Total liabilities
|
|
|
58,535,517
|
|
|
|
-
|
|
|
|
58,535,517
|
|
|
|
95,958,782
|
|
|
|
-
|
|
|
|
95,958,782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary shares (No par value; 304,449,091 and 300,841,995 shares issued and outstanding as of 31 March 2023 and 31 December 2022, respectively)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Additional paid-in capital
|
|
|
398,262,089
|
|
|
|
183,529,388
|
(1)
|
|
|
581,791,477
|
|
|
|
397,497,817
|
|
|
|
182,125,475
|
(1)
|
|
|
579,623,292
|
|
Accumulated other comprehensive loss
|
|
|
(4,945,127
|
)
|
|
|
4,945,127
|
|
|
|
-
|
|
|
|
(5,306,972
|
)
|
|
|
5,306,972
|
|
|
|
-
|
|
Reserves
|
|
|
-
|
|
|
|
20,955,416
|
(2)
|
|
|
20,955,416
|
|
|
|
-
|
|
|
|
21,997,484
|
(2)
|
|
|
21,997,484
|
|
Accumulated deficit
|
|
|
(230,782,125
|
)
|
|
|
(209,429,931
|
)
|
|
|
(440,212,056
|
)
|
|
|
(219,824,176
|
)
|
|
|
(209,429,931
|
)
|
|
|
(429,254,107
|
)
|
Total Stockholders' Equity
|
|
|
162,534,837
|
|
|
|
-
|
|
|
|
162,534,837
|
|
|
|
172,366,669
|
|
|
|
-
|
|
|
|
172,366,669
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-controlling interests
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(477,135
|
)
|
|
|
-
|
|
|
|
(477,135
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Equity
|
|
|
162,534,837
|
|
|
|
-
|
|
|
|
162,534,837
|
|
|
|
171,889,534
|
|
|
|
-
|
|
|
|
171,889,534
|
|
Total Liabilities and Equity
|
|
|
221,070,354
|
|
|
|
-
|
|
|
|
221,070,354
|
|
|
|
267,848,316
|
|
|
|
-
|
|
|
|
267,848,316
|
|
|
(1) |
Includes (i) $(28,458,264) (2022: $(27,304,456)) in share-based compensation payments. (ii) $2,557,721 recognized in 2023 from the acquisition of 35% of CAE’s equity interest, and (iii) additional equity of
$209,429,931 recognized in 2021 from the difference between the deemed transaction price and net assets acquired related to the Combination under IFRS.
|
|
(2) |
Includes (i) a reclassification of Accumulated other comprehensive loss under U.S. GAAP of $(4,945,127) (2022: $(5,306,972)), (ii) a reclassification of Additional paid-in capital under U.S. GAAP of
$28,458,264 (2022: $27,304,456) in share-based compensation payments to Reserves under IFRS, and (iii) a reclassification of Additional paid-in capital under U.S. GAAP of $(2,557,721) recognized in 2023 from the acquisition of 35% of
CAE’s equity interest to Reserve under IFRS.
|
The following table reconciles the Company’s statement of operations under U.S. GAAP for the three months ended 31 March 2023 and 2022 with its statement of operations under IFRS for the three
months ended 31 March 2023 and 2022, respectively.
As set forth below, the material differences between the U.S. GAAP and IFRS presentation with respect to the Group’s combined balance sheet as of 31 March 2023 and combined balance sheet as
of 31 December 2022 are as follows:
|
a) |
The reclassification of “Accumulated other comprehensive loss” under U.S. GAAP to “Reserves” under IFRS;
|
|
b) |
The reclassification of amounts of share-based payments from “Additional paid-in capital” under U.S. GAAP to “Reserves” under IFRS;
|
|
c) |
The reclassification of the amount recognized from the acquisition of 35% of CAE’s equity interest from “Additional paid-in capital” under U.S. GAAP to “Reserves” under IFRS; and
|
|
d) |
Additional equity recognized from the difference between the total deemed transaction price and net assets acquired related to the Combination under IFRS.
|
|
e) |
In 2021, the Company was deemed to have incurred non-cash listing costs of approximately $209.4 million as a result of the IFRS accounting treatment of the Combination, as Cenntro was deemed to have
received a 67% controlling interest in CEGL (formerly NBG) and the Group was deemed to have incurred listing costs equaling the difference between the total deemed transaction price and total net assets. Under U.S. GAAP, the Combination
is accounted for as a reverse recapitalization, which is equivalent to the issuance of shares by Cenntro for the net assets of CEGL (formerly NBG), accompanied by a recapitalization).
|
As set forth below, there is no difference between the U.S. GAAP and IFRS presentation as it relates to our combined statement of operations and comprehensive loss for the year ended 31 March
2023.
|
|
For the Three Months Ended
|
|
|
|
Unaudited 31 March 2023
|
|
|
Unaudited 31 March 2022
|
|
|
|
U.S. GAAP
|
|
|
IFRS
Difference
|
|
|
IFRS
|
|
|
U.S. GAAP
|
|
|
IFRS
Difference
|
|
|
IFRS
|
|
Net revenues
|
|
|
3,470,544
|
|
|
|
-
|
|
|
|
3,470,544
|
|
|
|
1,830,633
|
|
|
|
-
|
|
|
|
1,830,633
|
|
Cost of goods sold
|
|
|
(3,275,800
|
)
|
|
|
-
|
|
|
|
(3,275,800
|
)
|
|
|
(1,467,603
|
)
|
|
|
-
|
|
|
|
(1,467,603
|
)
|
Gross (Loss) Profit
|
|
|
194,744
|
|
|
|
-
|
|
|
|
194,744
|
|
|
|
363,030
|
|
|
|
-
|
|
|
|
363,030
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing expenses
|
|
|
(1,868,985
|
)
|
|
|
-
|
|
|
|
(1,868,985
|
)
|
|
|
(1,095,108
|
)
|
|
|
-
|
|
|
|
(1,095,108
|
)
|
General and administrative expenses
|
|
|
(7,358,264
|
)
|
|
|
-
|
|
|
|
(7,358,264
|
)
|
|
|
(8,211,831
|
)
|
|
|
-
|
|
|
|
(8,211,831
|
)
|
Research and development expenses
|
|
|
(1,569,919
|
)
|
|
|
-
|
|
|
|
(1,569,919
|
)
|
|
|
(425,359
|
)
|
|
|
-
|
|
|
|
(425,359
|
)
|
Total operating expenses
|
|
|
(10,797,168
|
)
|
|
|
-
|
|
|
|
(10,797,168
|
)
|
|
|
(9,732,298
|
)
|
|
|
-
|
|
|
|
(9,732,298
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(10,602,424
|
)
|
|
|
-
|
|
|
|
(10,602,424
|
)
|
|
|
(9,369,268
|
)
|
|
|
-
|
|
|
|
(9,369,268
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest (expense) income, net
|
|
|
(54,415
|
)
|
|
|
-
|
|
|
|
(54,415
|
)
|
|
|
64,201
|
|
|
|
-
|
|
|
|
64,201
|
|
Income from long-term investment
|
|
|
19,042
|
|
|
|
-
|
|
|
|
19,042
|
|
|
|
5,937
|
|
|
|
-
|
|
|
|
5,937
|
|
Impairment of long-term investment
|
|
|
(1,146,128
|
)
|
|
|
|
|
|
|
(1,146,128
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Loss on redemption of convertible promissory notes
|
|
|
(2,001
|
)
|
|
|
-
|
|
|
|
(2,001
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Loss on exercise of warrants
|
|
|
(212,870
|
)
|
|
|
|
|
|
|
(212,870
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Change in fair value of convertible promissory notes and derivative liability
|
|
|
(126,273
|
)
|
|
|
-
|
|
|
|
(126,273
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Change in fair value of equity securities
|
|
|
653,016
|
|
|
|
|
|
|
|
653,016
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other income (expense), net
|
|
|
358,076
|
|
|
|
-
|
|
|
|
358,076
|
|
|
|
(49,239
|
)
|
|
|
-
|
|
|
|
(49,239
|
)
|
Loss before income taxes
|
|
|
(11,113,977
|
)
|
|
|
-
|
|
|
|
(11,113,977
|
)
|
|
|
(9,348,369
|
)
|
|
|
-
|
|
|
|
(9,348,369
|
)
|
Income tax expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net loss
|
|
|
(11,113,977
|
)
|
|
|
-
|
|
|
|
(11,113,977
|
)
|
|
|
(9,348,369
|
)
|
|
|
-
|
|
|
|
(9,348,369
|
)
|
Less: net loss attributable to non-controlling interests
|
|
|
(156,028
|
)
|
|
|
-
|
|
|
|
(156,028
|
)
|
|
|
(36,719
|
)
|
|
|
-
|
|
|
|
(36,719
|
)
|
Net loss attributable to the Company’s shareholders
|
|
|
(10,957,949
|
)
|
|
|
-
|
|
|
|
(10,957,949
|
)
|
|
|
(9,311,650
|
)
|
|
|
-
|
|
|
|
(9,311,650
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
337,278
|
|
|
|
-
|
|
|
|
337,278
|
|
|
|
253,156 253,156
|
|
|
|
-
|
|
|
|
253,156 253,156
|
|
Total comprehensive loss
|
|
|
(10,776,699
|
)
|
|
|
-
|
|
|
|
(10,776,699
|
)
|
|
|
(9,095,213
|
)
|
|
|
-
|
|
|
|
(9,095,213
|
)
|
Less: total comprehensive loss attributable to non-controlling interests
|
|
|
(180,595
|
)
|
|
|
-
|
|
|
|
(180,595
|
)
|
|
|
(57,588
|
)
|
|
|
-
|
|
|
|
(57,588
|
)
|
Total comprehensive loss attributable to the Company’s shareholders
|
|
|
(10,596,104
|
)
|
|
|
-
|
|
|
|
(10,596,104
|
)
|
|
|
(9,037,625
|
)
|
|
|
-
|
|
|
|
(9,037,625
|
)
|
ITEM 3. |
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
As a smaller reporting company as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Company is not required to provide the information required by this item.
ITEM 4. |
CONTROLS AND PROCEDURES
|
Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Roles 12a-15(e) or 15d-15(e) under the Exchange Act) designed to ensure that information required to be disclosed by us in the reports that we file or
submit under the Exchange Act 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 Chief
Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required disclosure.
Our management, with the participation of our CEO and CFO, evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2023, as required by paragraph (b) of Rules 13a-15 or 15d-15 under
the Exchange Act. Based on this evaluation, management concluded that the Company's disclosure controls and procedures was not effective as of March 31, 2023, due to material weaknesses in the Company’s internal control over financial reporting
(as defined in Rules 13a-15(f) or 15d-15(f) under the Exchange Act) that have been previously identified but continue to exist. See Part II, Item 9A of the 2022 Form 10-K/A for additional information.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred during the first quarter of fiscal 2023 that have materially affected, or are reasonably likely to materially affect, the
Company’s internal control over financial reporting.
Remediation
As previously described in Part II, Item 9A of our Annual Report on Form 10-K/A for the fiscal year ended December 31,2022, we began implementing a remediation plan to address the material weakness mentioned above.
The weakness will not be considered remediated, until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.
ITEM 1. |
LEGAL PROCEEDINGS
|
From time to time, we may be subject to various legal claims and proceedings that arise from the normal course of business activities, including, third party intellectual property
infringement claims against us in the form of letters and other forms of communication. Litigation or any other legal or administrative proceeding, regardless of the outcome, could result in substantial cost, diversion of our resources,
including management’s time and attention, and, depending on the nature of the claims, reputational harm. In addition, if any litigation results in an unfavorable outcome, there exists the possibility of a material adverse impact on our results
of operations, prospects, cash flows, financial position and brand. Please refer to the description as contained in “Item 8 Financial Statements and Supplementary Data” on page F-1 of our Annual Report and the information described below.
In October 2021, Sevic Systems SE (“Sevic”), a former channel partner, commenced a lawsuit against Shengzhou Machinery, one of Cenntro’s wholly owned subsidiaries, relating to a contract for
the sale of goods (the “Sevic Lawsuit”). Sevic filed its complaint with the People’s Court of Keqiao District, Shaoxing City, Light Textile City (the “People’s Court”). In the Sevic Lawsuit, Sevic alleges that the Shengzhou Machinery provided
it with certain unmarketable goods and requests that the People’s Court (i) terminate two signed purchase orders under its contract with Shengzhou Machinery and (ii) award Sevic money damages for the cost of goods of $465,400, as well as
interest and incidental losses, including freight and storage costs, for total damages of approximately $628,109. The Company does not believe that Sevic’s claims have merit and intends to vigorously defend against such claims.
On March 25, 2022, Shengzhou Hengzhong Machinery Co., Ltd. (“Shengzhou”), an affiliate of Cenntro Automotive Corporation, filed a demand for arbitration against Tropos Technologies, Inc., a
non-affiliated entity, with the American Arbitration Association (“AAA”), asserting claims for breach of contract and unjust enrichment. Shengzhou is seeking payment of $1,126,640 (exclusive of interest, costs, and attorneys’ fees) for
outstanding invoices owed by Tropos Technologies, Inc. to Shengzhou. On February 16, 2023, AAA appointed an arbitrator and on April 25, 2023, Tropos Technologies, Inc. filed a motion to dismiss the arbitration demand. On May 23, 2023, Shengzhou
filed a response in opposition to the motion to dismiss the arbitration demand. As of the date of this report, the parties are awaiting further proceedings under the arbitration process.
On July 22, 2022, Xiongjian Chen (the “Plaintiff") filed a complaint against Cenntro Electric Group Limited (“CENN”), Cenntro Automotive Group Limited (“CAG”), Cenntro Enterprise Limited
(“CEL”) and Peter Z. Wang (“Wang,” together with CENN, CAG and CEL, the “Defendants”) in the United States District Court for the District of New Jersey. The complaint alleges eleven causes of action sounding in contract and tort against the
Defendants, all pertaining to stock options issued to Mr. Chen pursuant to his employment as Chief Operating Officer of CAG. With respect to the four contract claims, Plaintiff alleges breach of contract claims pertaining to an employment
agreement between Plaintiff and CAG and a purported letter agreement between Plaintiff and CEL. With respect to the seven tort claims, Plaintiff alleges claims regarding purported misrepresentations and promises made concerning the treatment of
Plaintiff’s stock options upon a corporate transaction, including claims for tortious interference, fraud, promissory estoppel, negligent misrepresentation, unjust enrichment and conversion. The complaint seeks, among other things, money
damages (including compensatory and consequential damages) in the amount of $19 million, plus interest, attorneys’ fees and expenses. Defendants moved to dismiss the complaint against all Defendants for failure to state a claim and for lack of
personal jurisdiction over defendants CAG and CEL. On April 30, 2023, the District Court dismissed the claims against CAG and CEL for lack of personal jurisdiction. In addition, the District Court dismissed all the claims against Wang and CENN
without prejudice and permitted the Plaintiff to amend his complaint within 30 days to address the deficiencies in his claims against Wang and CENN. On May 28, 2023, Plaintiff filed an amended complaint. On July 20, 2023 the Defendants filed a
motion seeking the dismissal of that amended complaint.
You should carefully consider the risks discussed in the section entitled “Risk Factors” in the 2022 Form 10-K/A, which could materially affect our business, financial condition, or future results. The risks
described in the 2022 Form 10-K/A are not the only risks facing the company. Additional risks and uncertainties not currently known to us or that we do not currently deem material, may also materially adversely affect our business, results of
operations, cash flows, and financial position.
ITEM 2. |
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|
There have been no sales of unregistered equity securities that we have not previously disclosed in filings with the U.S. Securities and Exchange Commission.
ITEM 3. |
DEFAULTS UPON SENIOR SECURITIES
|
None.
ITEM 4. |
MINE SAFETY DISCLOSURES
|
Not applicable.
ITEM 5. |
OTHER INFORMATION
|
None.
EXHIBIT INDEX
Exhibit
No.
|
|
Description of Exhibit
|
|
|
Certification of Principal Executive Officer required by Rule 13a-14(a).
|
|
|
Certification of Principal Financial Officer required by Rule 13a-14(a).
|
|
|
Certification required by Section 1350 of Chapter 63 of Title 18 of the United States Code.
|
101.INS*
|
|
Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
|
101.SCH*
|
|
Inline XBRL Taxonomy Extension Schema Document
|
101.CAL*
|
|
Inline XBRL Taxonomy Extension Calculation Linkbase Document
|
101.DEF*
|
|
Inline XBRL Taxonomy Extension Definition Linkbase Document
|
101.LAB*
|
|
Inline XBRL Taxonomy Extension Label Linkbase Document
|
101.PRE*
|
|
Inline XBRL Taxonomy Extension Presentation Linkbase Document
|
104*
|
|
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibits 101)
|
*
|
Filed herewith.
|
|
|
**
|
Furnished herewith.
|
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
CENNTRO ELECTRIC GROUP LIMITED
Dated: July 25, 2023. |
|
|
|
|
CENNTRO ELECTRIC GROUP LIMITED
|
|
|
|
|
By:
|
/s/ Peter Z. Wang
|
|
|
Peter Z. Wang
|
|
|
Chief Executive Officer
|
|
|
(Principal Executive Officer)
|
|
|
|
|
By:
|
/s/ Edmond Cheng
|
|
|
Edmond Cheng
|
|
|
Chief Financial Officer
|
|
|
(Principal Accounting Officer)
|
46