QUANERGY SYSTEMS, INC. The following discussion ofQuanergy's results of operations and financial condition should be read in conjunction with the information set forth in the financial statements and the notes thereto included elsewhere in this Form 10-Q. This discussion may contain forward-looking statements based uponQuanergy's current expectations, estimates, and projections that involve risks and uncertainties. Actual results could differ materially from those anticipated in these forward-looking statements due to, among other considerations, the matters discussed under "Risk Factors." Unless the context otherwise requires, all references in this section to "we," "our," "us" "the Company" or "Quanergy" refer to the business ofQuanergy Systems, Inc. , aDelaware corporation, and its subsidiaries. Overview We design, develop and produce Light Detection and Ranging ("LiDAR") sensors and are a leader in 3D sensing that delivers robust and intelligent real-time 3D object detection and classification solutions. Currently, our applications and products are targeted towards five key market groups: 1) the Security market where we build applications leveraging the mechanical M Series LiDAR combined with proprietary software for perimeter security and intrusion detection applications; 2) the Smart Cities / Spaces market, where our flow management tools are used in cities and municipalities to improve the movement and safety of their citizens in dense urban settings; 3) the Mapping market, where customers are currently utilizing the M8 mechanical LiDAR for terrestrial and aerial mapping; 4) the Industrial market, where we are launching our solid state and mechanical LiDAR solutions for material handling, logistics, and measurement; and 5) the Transportation market which consists of passenger vehicles as well as heavy vehicles and off highway applications such as agricultural and mining equipment, which we are primarily looking to service through our solid state S Series LiDAR for use in Advanced Driver Assist Systems as well as in highly automated vehicle applications. We generate revenue primarily by entering into supply arrangements with systems integrators, value added resellers, distributors and end customers. We have also, in the past, received funds from evaluation agreements, where a customer obtains early access to technology through evaluation samples of products and related software. To date, we have financed our operations primarily through private placements of convertible preferred stock and issuance of convertible notes. From the date of our incorporation throughJune 30, 2022 , we have raised, in the aggregate, net proceeds of approximately$296 million , including approximately$153 million from the issuance of convertible preferred stock, approximately$89 million from the issuance of convertible notes, approximately$44 million of net proceeds from the Business Combination and approximately$10 million from an initial draw down of the share subscription facility withGlobal Emerging Markets Group ("GEM"), a Luxembourg-based private alternative investment group. In the year endedDecember 31, 2021 and six months endedJune 30, 2022 , we incurred a net loss of$63.5 million and$130.4 million , respectively, and used$30.1 million and$33.3 million , respectively, in cash to fund our operations. We have an accumulated deficit of$438.0 million since our formation. Over the last two years, key changes to our R&D and product development organizations have accelerated the pace of product releases. In the year endedDecember 31, 2020 , we released 10 new solutions (four sensors, four software products, and two VMS integrations). In the year endedDecember 31, 2021 , we released 10 new solutions (two sensors and eight software products). During the six months endedJune 30, 2022 , we released five new solutions (three sensor and two software products). We expect to continue investing in R&D and product development to further support sales growth going forward. The years endedDecember 31, 2021 and 2020 were also critical years for the development of our S3 platform. After receiving new hardware at the end of 2019, we devoted much of the years endedDecember 31, 2021 and 2020 to a testing and optimization program that increased the outdoor range of our sensors from 20 meters inJanuary 2020 to 100 meters byJanuary 2021 and to 250 meters presently. As we continue to fine tune a new silicon detector, we expect to improve our sensor performance and increase our technical relevance for transportation and industrial applications.
COVID-19 impact
Our financial results and operations continue to be impacted by the novel coronavirus ("COVID-19") that began during 2020. The ongoing pandemic has resulted in significant disruptions to global economies, supply chains, distribution networks, the rate of inflation and consumer behavior around the world.
We have experienced unfavorable impacts to our financial results and operations
since the pandemic began primarily due to the delay of projects and slowing
overall business activity, as well as, in certain cases, the inability to
physically access customer sites. Despite these setbacks, we reacted quickly to
help offset the negative cash flow impacts of these factors with key elements of
our cash preservation plan in 2020 including employee furloughs, negotiating
extended payment terms with vendors, cutting wages and
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reducing overall external contractor spending. We also benefited from a $2.5
million Paycheck Protection Program ("PPP") loan from the Small Business
Administration available under the CARES Act enacted for COVID-19 relief. We
continue to maintain a cautious pace of spending on core operating activities
and have been impacted by large transaction related expenses such as elevated
legal and accounting fees and public company insurance costs since becoming a
public entity.
While business conditions improved significantly year-over-year, over the last
five quarters including, the three months ended June 30, 2022 , broader
implications of the COVID-19 pandemic were present throughout the year on our
workforce, operations, supply chain and customer demand. For the remainder of
2022, we envision significant uncertainties remaining, including those related
to disruptions from COVID-19, broad based supply chain shortages and
geopolitical risks related to the events in the Ukraine .
Comparability of financial information
Our results of operations and statements of assets and liabilities may not be comparable between periods as a result of the Business Combination (as defined below).
Business combination and public company costs
OnFebruary 8, 2022 (the "Closing Date"), subsequent to the end of the fiscal year endedDecember 31, 2021 , the fiscal year to which this management's discussion and analysis of financial condition and results of operations relates,Quanergy Systems, Inc. ("Legacy Quanergy"), aDelaware corporation (f/k/aCITIC Capital Acquisition Corp. ("CCAC")), consummated the previously announced merger (the "Closing") pursuant to that certain Agreement and Plan of Merger, datedJune 21, 2021 , as amended onJune 28, 2021 ,November 14, 2021 andDecember 26, 2021 (the "Merger Agreement"), by and among CCAC,CITIC Capital Merger Sub Inc. , aDelaware corporation and direct wholly owned subsidiary of CCAC ("Merger Sub") and Legacy Quanergy. CCAC's shareholders approved the Business Combination (the "Business Combination") and the change of CCAC's jurisdiction of incorporation from theCayman Islands to theState of Delaware by deregistering as an exempted company in theCayman Islands and domesticating and continuing as a corporation formed under the laws of theState of Delaware (the "Domestication") at an extraordinary general meeting of stockholders held onJanuary 31, 2022 . OnFebruary 7, 2022 , one business day prior to the Closing Date, CCAC effectuated the Domestication, pursuant to which each of CCAC's currently issued and outstanding Class A ordinary shares and Class B ordinary shares automatically converted by operation of law, on a one-for-one basis, into shares of our common stock ("Common Stock"). Similarly, all of CCAC's outstanding warrants became warrants to acquire shares of Common Stock, and no other changes were made to the terms of any outstanding warrants. Pursuant to the terms of the Merger Agreement, the Business Combination was effected through the merger (the "Merger") of Merger Sub with and into LegacyQuanergy , whereupon the separate corporate existence of Merger Sub ceased andQuanergy became the surviving company and a wholly owned subsidiary of CCAC. In connection with the Domestication, CCAC changed its name fromCITIC Capital Acquisition Corp. toQuanergy Systems, Inc.
In addition, on the Closing Date, purchasers subscribed to purchase an aggregate
of 3,695,000 shares of our Common Stock (the "PIPE Shares"), for a purchase
price of
The Business Combination was accounted for as a reverse recapitalization. Under this method of accounting, CCAC is treated as the acquired company for financial statement reporting purposes. As a result of the Merger, the most significant change in our financial position and results are an increase in cash of$8.8 million , including approximately$37.0 million in gross proceeds from the sale of PIPE Shares and net of$35.0 million of indebtedness that was repaid at close of the Business Combination. As a consequence of the Merger, we have become the successor to aSecurities and Exchange Commission ("SEC") registered and listed company under the ticker "QNGY" withNew York Stock Exchange , which will require us to hire additional personnel and implement ongoing procedures and processes to address public company regulatory requirements and customary practices.
Recent developments
Notice of failure to satisfy continued listing rules
OnJune 17, 2022 , we received a written notice from theNew York Stock Exchange (the "NYSE") that we are no longer in compliance with the NYSE continued listing standards, set forth in Section 802.01C of the NYSE Listed Company Manual because the average closing price of our Common Stock was less than$1.00 per share over a period of 30 consecutive trading days. OnJuly 25th, 2022 , we received a written notice from the NYSE that we are no longer in compliance with the continued listing standards set forth in Rule 802.01B of the NYSE Listed Company Manual because our average global market capitalization over a consecutive 30 trading-day period was less than$50 million and, at the same time, our last reported shareholders' equity was less than$50 million . 26 -------------------------------------------------------------------------------- The notices have no immediate impact on the listing of our Common Stock, which will continue to be listed and traded on the NYSE during applicable cure periods, and do not result in a default under the Company's material debt or other agreements. To address this issue, we intend to monitor the trading price of our listed securities and take steps to increase the value of our shares through implementation of our business strategy, and are considering all available options to regain compliance with the NYSE's continued listing standards. See " Risk Factors- Risks Related to Investing in Our Securities-Our failure to meet the continued listing requirements of NYSE could result in a delisting of our securities" for additional information.
Factors affecting our performance
Pricing, product costs and margins
Our pricing and margins will depend on the volumes and the features as well as specific market applications of the solutions we provide to our customers. To date, most of our revenue has been generated from flow management solutions which entail M Series sensors paired with our Qortex software for Smart City, Smart Spaces and Security applications. As we expand further into the industrial market, we expect prices to generally decrease as these products are adopted into higher volume programs with higher price sensitivity and in many cases less complex performance requirements. This downward trend in Average Selling Prices is expected to continue over time as we incorporate orders from the transportation market where cost pressures can be significant. As an offset to these pressures, we expected to benefit from improved fixed cost absorption as revenues scale and we are able to amortize fixed costs among more units, and improved variable costs from scale and redesign opportunities. Through both of these we expect to be able to keep costs down ahead of potential future price decreases which is accretive to margins. Our ability to compete in key markets will depend on the success of our efforts to efficiently and reliably produce cost-effective smart vision solutions for our commercial-stage customers. We anticipate that our process will vary by market and application due to market-specific product and commercial requirements, supply and demand dynamics and product lifecycles.
Commercialization of LiDAR based applications
We believe the LiDAR market today represents a sizable opportunity, and we see significant growth in the total addressable market across multiple end markets. We also believe we are well-positioned to take advantage of this opportunity, with strong customer relationships and differentiated products that give us opportunities across many different use cases. With that said, we expect that our results of operations, including revenue and gross margins, will fluctuate on a quarterly basis for the foreseeable future as our results are significantly impacted by the timing of individual projects, customer adoption, and overall sales cycles within each vertical. As more customers reach the commercialization phase and as the market for LiDAR solutions matures, these fluctuations in our operating results may become less pronounced. However, in the near term, our revenue may not grow as we expect until more customers commercialize their products.
End market concentration
Until now, the majority of our revenue has come from flow management applications which make up 73% and 74% of our revenue for the three and six months endedJune 30, 2022 , respectively, with the balance of revenues being from various other sources. This is because we have had these solutions in market for some time and have been able to digest customer feedback and improve the products to optimize their performance for these use cases. We believe our entry into new markets will continue to facilitate revenue growth and customer diversification. While we will continue to expand the end markets we serve, we anticipate that sales to a limited number of end markets will continue to account for a significant portion of our total revenue for the foreseeable future. Our end market concentration may cause our financial performance to fluctuate significantly from period to period based on the success or failure of the markets in which we compete. Success in an end market, or commercialization, is uncertain and may develop differently in each case, with unique pricing, volume, and cost dynamics. Additionally, as production scales in order to meet the demands of commercialization, pricing pressure typically increases, and the amount of that pressure is expected to vary by market.
Sales volume
Sales volumes for our solutions can vary significantly by customer. This can depend on several factors, including the reputation of the end customer, market penetration, product capabilities, size of the end market that the product addresses and our end customers' ability to sell their products. In addition to end market demand, sales volumes can also depend on the stage of development, with significantly higher volumes being typically associated with the production phase vs development phase. Our business can be significantly impacted by our ability to estimate these customer commitments and select projects that will successfully transition from development to production.
Continued investment and innovation
Our financial performance is significantly dependent on our ability to build on
our position in the LiDAR market. This is dependent on the investments we make
in research and development. It is essential that we continually identify and
respond to rapidly evolving customer requirements, develop, and introduce
innovative new products, enhance and service existing products and generate
active
27
--------------------------------------------------------------------------------market demand for our products. If we fail to do this, our leading market position and revenue may be adversely affected, and our investments in that area may not be recovered.
Market trends and uncertainties
We believe our business prospects are supported by favorable market trends that
are likely to support growth in the LiDAR market over the next several years. We
see the largest near-term growth opportunities coming from the Internet of
Things ("IoT") markets which encompass flow management and the industrial
market. In the shorter term we see the largest pipeline of opportunities at
Quanergy coming from flow management solutions driven by increased demand from
smart city, smart spaces, and security applications for managing human and
vehicle movements in densely populated environments. We also expect a rapidly
increasing opportunity from the industrial market driven by increasing levels of
automation for manufacturing, material handling and logistics. We believe that
the transportation market represents a significant opportunity over time as auto
original equipment manufacturers' ("OEMs") shift from driver assist systems to
increasing levels of automation, responding to consumer demands for increased
safety and convenience. While the technology for significant automation at low
volumes exists today, we believe high volume production of highly automated
vehicles with LiDAR sensors is several years away as systems still need to see
improvements in cost and performance. Our expectation is that some large volume
LiDAR based programs will start to see deployment mid-decade with significant
industry growth thereafter.
Although increasing adoption of LiDAR technology may generate higher demand, we may not be able to take advantage of demand if we are unable to anticipate customer needs quickly enough. The LiDAR industry is competitive with many well-funded new entrants, so we will need to build on our positioning with robust investment in new product to increase market acceptance of our LiDAR technology.
Margin improvements
Our product costs and gross margins will depend largely on the volumes of the solutions we provide to our customers. Our ability to compete in our target markets will depend on the success of our digital LiDAR solutions and the ultimate volume of our sensors sold. We anticipate that our selling process will vary by target end market and application due to market-specific supply and demand dynamics. We expect these customer-specific selling price fluctuations combined with our volume-driven product costs may drive fluctuations in revenue and gross margins on a quarterly basis. However, we expect that volume-driven product cost improvements will lead to a gross margin improvement as our sales volume increases over time. Non-GAAP Financial Measures We consider adjusted EBITDA to be an important non-GAAP financial measure because it helps illustrate underlying trends in our business and our historical operating performance on a more consistent basis. We believe that the use of adjusted EBITDA is helpful to our investors as it is a metric used by management in assessing the health of our business and our operating performance. However, non-GAAP financial information is presented for supplemental informational purposes only, has limitations as an analytical tool and should not be considered in isolation or as a substitute for financial information presented in accordance with GAAP. In addition, other companies, including companies in our industry, may calculate similarly titled non-GAAP measures differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of our non-GAAP financial measures as tools for comparison. A reconciliation is provided below for the non-GAAP financial measure to the most directly comparable financial measure stated in accordance with GAAP. Investors are encouraged to review the related GAAP financial measure and the reconciliation of this non-GAAP financial measure to its most directly comparable GAAP financial measure, and not to rely on any single financial measure to evaluate our business.
Adjusted EBITDA
Adjusted EBITDA is a key performance measure that our management uses to assess
our operating performance. Because adjusted EBITDA facilitates internal
comparisons of our historical operating performance on a more consistent basis,
we use this measure for business planning purposes. We define adjusted EBITDA as
net loss before depreciation and amortization, provision for income taxes,
interest expense (net), non-cash gain or loss on debt transactions, certain
non-recurring gains and losses and any extraordinary, unusual or non-recurring
charges, expenses or losses, restructuring costs, stock-based compensation and
change in fair value of derivative instruments.
Our adjusted EBITDA may not be comparable to similarly titled measures of other
companies because they may not calculate adjusted EBITDA in the same manner as
we calculate the measure, limiting its usefulness as a comparative measure. Our
presentation of adjusted EBITDA should not be construed as an inference that our
future results will be unaffected by these expenses or any unusual or
non-recurring items. When evaluating our performance, you should consider
adjusted EBITDA alongside other financial performance measures, including our
net loss and other GAAP results.
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The following table reconciles net loss to adjusted EBITDA for the three and six
months ended
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
($ in thousands) ($ in thousands)
Adjusted EBITDA
Net loss $ (25,674 ) $ (20,467 ) $ (130,356 ) $ (35,181 )
Stock-based compensation expense 5,251 5,725 56,812 7,306
Depreciation and amortization 244 239 472 490
Interest expense 25 5,279 40,071 8,964
Interest income (15 ) (2 ) (17 ) (3 )
Change in fair value of derivatives 7,645 5,182 9,982 7,499
Gain on forgiveness of debt - (2,515 ) - (2,515 )
Income tax provision 3 6 6 10
Adjusted EBITDA $ (12,521 ) $ (6,553 ) $ (23,030 ) $ (13,430 )
Some of the limitations of adjusted EBITDA include (i) adjusted EBITDA does not
properly reflect capital commitments to be paid in the future, and (ii) although
depreciation and amortization are non-cash charges, the underlying assets may
need to be replaced and adjusted EBITDA does not reflect these capital
expenditures. In evaluating adjusted EBITDA, you should be aware that in the
future we may incur expenses similar to the adjustments in this presentation.
Basis of presentation
Quanergy currently conducts its business through a single operating segment. Substantially all our long-lived assets are maintained in, and our losses are attributable to,the United States of America . See "Note 1-Basis of Presentation and Summary of Significant Accounting Policies" and "Note 16-Segment Information and Geographic Information" in our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report for more information on basis of presentation and operating segment, respectively.
Components of results of operations
We generate revenue primarily by entering into standard supply arrangements with systems integrators, value added resellers, distributors, and end users. These end-customers and channel partners typically bundle Qortex perception software with a perpetual or term license, and/or services related to the support of the software and hardware and/or installation services. We also have instances of standalone sales of sensors and hardware equipment to customers.
Standard Supply Arrangements
We recognize revenue from sales of products and services upon delivery. Delivery
occurs upon transfer of title and all risks and rewards of ownership to the
customer, which is generally upon shipment. Maintenance and support revenue is
recognized ratably over the term of the support period. Certain of our
arrangements are multiple-element arrangements with a combination of product and
service.
We mostly use Distributors and System Integrators ("SIs") to complement our
direct sales and marketing efforts. The Distributors and SIs receive business
terms of sale similar to those received by our direct customers, and payment to
us is not contingent on the receipt of payment from the end customer. The
Distributors and SIs negotiate pricing with the customer and are responsible for
certain support levels directly with the customer.
Cost of Goods Sold
Cost of goods sold includes actual cost of material, labor, and manufacturing overhead, including depreciation and amortization, incurred for revenue- producing units shipped and includes associated warranty costs and other costs. Cost of goods sold also includes employee-related costs, including salaries, bonuses, stock-based compensation expense and employee benefit costs associated with the manufacturing of our LiDAR sensors. We expect cost of goods sold to increase in absolute dollars in future periods along with our revenue levels.
Gross Profit and Gross Margin
Our gross profit represents net sales less our total costs of goods sold, and our gross margin is our gross profit expressed as a percentage of our total revenues. We expect that gross profit and gross margin will continue to be affected by various factors including
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our pricing, volumes, and amount of investment to maintain or expand our sensors
and sensing solutions, excess and obsolete inventories, cost structure for
manufacturing operations, product support obligations, share-based compensation
expenses, as well as allocated overhead. We expect our gross profit and gross
margins to improve over the long term, although it varies by product and could
fluctuate from period to period depending on the factors described above.
Operating Expenses
Operating expenses consist of sales and marketing, research and development expenses and general and administrative expenses. Personnel-related costs are the most significant component of our operating expenses and include salaries, benefits and stock-based compensation expenses. Our full-time employee headcount within the sales and marketing, research and development and general and administrative departments combined increased by 4 and 9, respectively, in the three and six months endedJune 30, 2022 , with the leading growth in the sales and marketing function. We expect to continue to hire new employees within these departments to support our growth. The timing of these additional hires could materially affect our operating expenses in any particular period.
We expect to continue to invest substantial resources to support our growth and anticipate that each of the following categories of operating expenses will increase in absolute dollar amounts for the foreseeable future.
Research and Development Expenses
Research and development expenses consist primarily of personnel-related costs directly associated with our research and development organization. These expenses also include non-personnel costs such as professional fees payable to third parties, license and subscription fees for development tools, pre-production product related costs including wafer fabrication costs, and other expenses related to collaborative arrangements. Our research and development efforts are focused on enhancing and developing additional functionality for our existing products and on new product development, including new releases and upgrades to our LiDAR sensors. We expense research and development costs as incurred. We expect our research and development expenses to increase in absolute dollars as we increase our investment in new mechanical sensors, in engineering development for our S-Series program as well as in hardware and software development to broaden the capabilities of our solutions and introduce new products and features.
Sales and Marketing
Our sales and marketing expenses consist primarily of personnel-related costs directly associated with our sales and marketing activities. These include the cost of sales commissions, marketing programs, trade shows, consulting services, promotional materials, demonstration equipment, an allocated portion of facility and IT costs and depreciation. We intend to continue to make significant investments in our sales and marketing organization to drive additional revenue, further penetrate the market and expand our global customer base. As a result, we expect our sales and marketing expenses to increase in absolute dollars as we expect to invest in growing and training our sales force and broadening our brand awareness.
General and Administrative Expenses
General and administrative expenses primarily consist of personnel-related expenses associated with our general and administrative organization, professional fees for legal, accounting, other consulting services, as well as an allocated portion of facility and IT costs and depreciation. We expect to incur additional general and administrative expenses as a public company, including expenses related to compliance with the rules and regulations of theSEC and stock exchange listing standards, additional insurance expenses (including directors' and officers' insurance), investor relations activities and other administrative and professional services. We also expect to increase the size of the general and administrative function to support the growth of our business. However, we anticipate selling, general, and administrative expenses to decrease as a percentage of revenue over the long term.
Other Income (Expense)
Other income (expense) consists mainly of interest income, interest expense and other expenses. We receive interest income from our cash and cash equivalents investments in money market funds. Interest expense relates to interest on issuance of convertible notes and amortization of debt discount and issuance costs. Other expense includes periodic adjustments to derivative instruments at each balance sheet date and the change in fair value of warrant liabilities.
Provision for income taxes
Our provision for income taxes consists of federal, state, and foreign current and deferred income taxes. As we expand the scale and scope of our international business activities, any changes inthe United States and foreign taxation of such activities may increase our overall provision for income taxes in the future. 30 -------------------------------------------------------------------------------- We have a full valuation allowance for net deferred tax assets, including federal and state net operating loss carryforwards and research and development credit carryforwards. We expect to maintain this valuation allowance until it becomes more likely than not that the benefit of our federal and state deferred tax assets will be realized by way of expected future taxable income. We believe that we have adequately reserved for our uncertain tax positions, although we can provide no assurance that the final outcome of these matters will not be materially different. To the extent that the final outcome of these matters is different than the amounts recorded, such differences will affect the provision for income taxes in the period in which such determination is made and could have a material impact on our financial condition and results of operations.
Results of Operations
Comparisons for the three months ended
The following table sets forth our condensed results of operations data for the
periods presented:
Three Months Ended June 30,
2022 2021 $ Change % Change
($ in thousands)
Net sales $ 1,189 $ 905 $ 284 31 %
Cost of goods sold(1) 2,453 760 1,693 223 %
Gross profit (loss) (1,264 ) 145 (1,409 ) -969 %
Research and development(1) 6,441 3,740 2,701 72 %
Sales and marketing(1) 4,092 2,223 1,869 84 %
General and administrative(1) 6,219 6,699 (480 ) -7 %
Operating expenses 16,752 12,662 4,090 32 %
Operating loss (18,016 ) (12,517 ) (5,499 ) 44 %
Other income (expense):
Interest income (expense), net (10 ) (5,277 ) 5,267 -100 %
Other income (expense), net (7,645 ) (2,667 ) (4,978 ) 187 %
Loss before income taxes (25,671 ) (20,461 ) (5,210 ) 25 %
Provision for income taxes (3 ) (6 ) 3 -50 %
Net loss $ (25,674 ) $ (20,467 ) $ (5,207 ) 25 %
(1) Includes stock-based compensation expense (unaudited) as follows, in
thousands:
Three Months Ended June 30,
2022 2021
Cost of goods sold $ 154 $ 21
Research and development 1,464 455
Sales and marketing 1,244 230
General and administrative 2,389 5,019
$ 5,251 $ 5,725
Our stock-based compensation expense is primarily related to our stock options,
restricted stock units, and restricted stock awards for all periods presented.
For the three months ended June 30, 2022 , $4.2 million of compensation expense
related to restricted stock units ("RSUs") has been recognized as the
performance vesting condition has been satisfied on the closing of a merger of
the Company with a special purpose acquisition company.
Considering that our operating expenses are significantly higher than reported
revenue for the periods presented, presenting the unaudited consolidated
statement of operations data as a percentage of revenue would not be meaningful,
and hence it has been omitted.
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--------------------------------------------------------------------------------Net Sales Three Months Ended June 30, 2022 2021 $ Change % Change ($ in thousands) Net Sales $ 1,189$ 905 $ 284 31 %
Net sales by geographic location
Three Months Ended June 30,
2022 2021 $ Change % Change
($ in thousands)
Americas $ 521 $ 125 396 317 %
Asia 388 642 (254 ) -40 %
Europe, Middle East and Africa 280 138 142 103 %
Total net sales $ 1,189 $ 905 284 31 %
Net sales increased by $0.3 million in the three months ended June 30, 2022
compared to the same period in 2021. This increase is the result of increased
customer orders along-side of general economic activity supported by maturing
channel partnerships which helped drive an increase in M series LiDAR Sensor
revenue. Security and Smart Spaces customers have been the largest drivers of
this improvement. We also continued to see easing in the impact of COVID-19 on
business conditions relative to the three months ended June 30, 2021 .
Cost of Goods Sold and Gross Margin
Three Months Ended June 30,
2022 2021 $ Change % Change
($ in thousands)
Cost of goods sold $ 2,453 $ 760 $ 1,693 223 %
Gross margin (1,264 ) 145 (1,409 ) -969 %
Gross margin % -106 % 16 %
Cost of goods sold increased by $1.7 million in the three months ended June 30,
2022 compared to the same period in 2021, while gross profit decreased by $1.4
million during the same period. The increase in cost of goods sold and resultant
decrease in gross margin was mainly attributable to a $1.0 million inventory
purchase price adjustment and a $0.4 million increase in labor costs required to
service future growth with hiring in anticipation of increased demand. The
remaining increase was due to a $0.1 million increase in materials costs, a $0.1
million increase in stock-based compensation and a $0.1 million increase in
services.
Operating Expenses
Three Months Ended June 30,
2022 2021 $ Change % Change
($ in thousands)
Research and development $ 6,441 $ 3,740 $ 2,701 72 %
Sales and marketing 4,092 2,223 1,869 84 %
General and administrative 6,219 6,699 (480 ) -7 %
$ 16,752 $ 12,662 $ 4,090 32 %
Research and Development Expenses
Research and development expenses increased by$2.7 million in the three months endedJune 30, 2022 compared to the same period in 2021. The increase was primarily attributable to a$1.1 million increase in personnel and related fringe costs resulting from increased headcount, which includes a$0.4 million increase due to retention bonuses, and a$1.0 million increase in stock-based compensation, mainly for RSUs that vested or began vesting upon the closing of the Business Combination. The remaining increase was due to a$0.5 million increase in manufacturing overhead and materials and a$0.1 million increase in services. 32 --------------------------------------------------------------------------------
Sales and Marketing
Sales and marketing expense increased by$1.9 million in the three months endedJune 30, 2022 compared to the same period in 2021. The increase was primarily attributable to a$1.0 million increase in stock-based compensation, a$0.3 million increase in personnel and related fringe costs resulting from increased headcount, a$0.3 million increase in commission expense on increased sales, a$0.2 million increase in travel and marketing related expenses and a$0.1 million increase in services.
General and Administrative Expense
General and administrative expense decreased by$0.5 million in the three months endedJune 30, 2022 compared to the same period in 2021. The net decrease was primarily attributable to a$2.6 million decrease in stock-based compensation costs related to restricted stock awards, partially offset by a$1.1 million increase in insurance costs as a result of the Business Combination, a$0.5 million increase in personnel and related fringe costs, a$0.2 million increase in legal and consulting fees as a result of the Business Combination, a$0.2 million increase in a settlement liability and a$0.1 increase in services.
Interest Expense, Net and Other Income (Expense), Net
Three Months Ended June 30,
2022 2021 $ Change % Change
($ in thousands)
Interest expense, net $ (10 ) $ (5,277 ) $ 5,267 -100 %
Other income (expense), net $ (7,645 ) $ (2,667 ) $ (4,978 ) 187 %
Interest expense, net decreased $5.3 million in the three months ended June 30,
2022 compared to the same period in 2021. The decrease was primarily attributed
to the extinguishment of debt at closing of the Business Combination.
Other income (expense), net increased $5.0 million in the three months ended
June 30, 2022 compared to the same period in 2021. The increase was primarily
attributed to an $8.9 million loss related to the change in fair value of a
share-settled forward. The remaining increase consisted of a $2.5 million
increase related to a gain on the forgiveness of a PPP loan in 2021, offset by a
$6.4 million decrease related to changes in fair values of the Company's
derivative liabilities.
Income Taxes
Three Months Ended June 30,
2022 2021 $ Change % Change
($ in thousands)
Loss before income taxes $ (25,671 ) $ (20,461 ) $ (5,210 ) 25 %
Provision for income taxes $ (3 ) $ (6 ) $ 3 -50 %
We are subject to income taxes in the United States , China , Japan , UK , Germany
and Canada . The change in the provision for income taxes during the three months
ended June 30, 2022 , as compared to the three months ended June 30, 2021 , was
immaterial.
33
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Comparisons for the six months ended
The following table sets forth our condensed results of operations data for the
periods presented:
For the Six Months Ended June 30,
2022 2021 $ Change % Change
($ in thousands)
Net sales $ 2,556 $ 1,288 $ 1,268 98 %
Cost of goods sold(1) 4,306 1,257 3,049 243 %
Gross profit (loss) (1,750 ) 31 (1,781 ) -5668 %
Research and development(1) 19,265 8,097 11,168 138 %
Sales and marketing(1) 11,288 3,968 7,320 184 %
General and administrative(1) 48,011 9,192 38,819 422 %
Operating expenses 78,564 21,257 57,307 270 %
Operating loss (80,314 ) (21,226 ) (59,088 ) 278 %
Other income (expense):
Interest income (expense), net (40,054 ) (8,961 ) (31,093 ) 347 %
Other income (expense), net (9,982 ) (4,984 ) (4,998 ) 100 %
Loss before income taxes (130,350 ) (35,171 ) (95,179 ) 271 %
Provision for income taxes (6 ) (10 ) 4 -40 %
Net loss $ (130,356 ) $ (35,181 ) $ (95,175 ) 271 %
(1) Includes stock-based compensation expense (unaudited) as follows, in
thousands:
Six Months Ended June 30,
2022 2021
Cost of goods sold $ 837 $ 41
Research and development 9,141 896
Sales and marketing 5,842 442
General and administrative 40,992 5,927
$ 56,812 $ 7,306
Our stock-based compensation expense is primarily related to our stock options,
restricted stock units, and restricted stock awards for all periods presented.
For the six months ended June 30, 2022 , $54.9 million of compensation expense
related to RSUs has been recognized as the performance vesting condition has
been satisfied on the closing of a merger of the Company with a special purpose
acquisition company.
Net Sales
Six Months Ended June 30,
2022 2021 $ Change % Change
($ in thousands)
Net Sales $ 2,556 $ 1,288 $ 1,268 98 %
Net sales by geographic location
Six Months Ended June 30,
2022 2021 $ Change % Change
($ in thousands)
Americas $ 797 $ 296 501 169 %
Asia 1,132 791 341 43 %
Europe, Middle East and Africa 627 201 426 212 %
Total net sales $ 2,556 $ 1,288 1,268 98 %
Net sales increased by $1.3 million in the six months ended June 30, 2022
compared to the same period in 2021. This increase is the result of increased
customer orders supported by general economic activity and a more mature set of
channel partner relationships which helped support an increase in M series LiDAR
Sensor revenue. Security and Smart Spaces customers have remained the largest
drivers of this improvement. We also saw some easing in the impact of COVID-19
on business conditions relative to the same period last year.
34
--------------------------------------------------------------------------------Cost of Goods Sold and Gross Margin
Six Months Ended June 30,
2022 2021 $ Change % Change
($ in thousands)
Cost of goods sold $ 4,306 $ 1,257 $ 3,049 243 %
Gross margin (1,750 ) 31 (1,781 ) -5668 %
Gross margin % -68 % 2 %
Cost of goods sold increased by $3.0 million in the six months ended June 30,
2022 compared to the same period in 2021, while gross profit decreased by $1.8
million during the same period. The increase in cost of goods sold and the
resultant decrease in gross margin was mainly attributable to a $1.0 million
inventory purchase price adjustment, a $0.8 million increase in stock-based
compensation, a $0.7 million increase in labor costs required to service future
growth with hiring in anticipation of increased demand and a $0.5 million
increase in materials cost.
Operating Expenses
Six Months Ended June 30,
2022 2021 $ Change % Change
($ in thousands)
Research and development $ 19,265 $ 8,097 $ 11,168 138 %
Sales and marketing 11,288 3,968 7,320 184 %
General and administrative 48,011 9,192 38,819 422 %
$ 78,564 $ 21,257 $ 57,307 270 %
Research and Development Expenses
Research and development expenses increased by$11.2 million in the six months endedJune 30, 2022 compared to the same period in 2021. The increase was primarily attributable to a$8.2 million increase in stock-based compensation, mainly for RSUs that vested or began vesting upon the closing of the Business Combination. The remaining increase was due to a$2.2 million increase in personnel and related fringe costs resulting from increased headcount, a$0.5 million increase in material and tools supplies costs and a$0.3 million increase in services.
Sales and Marketing
Sales and marketing expense increased by$7.3 million in the six months endedJune 30, 2022 compared to the same period in 2021. The increase was primarily attributable to a$5.4 million increase in stock-based compensation, with the remaining increase due to a$0.7 million increase in personnel and related fringe costs resulting from increased headcount, a$0.6 million increase in tradeshow and marketing costs resulting from increased business activity, a$0.4 million increase in commission costs on increased sales and a$0.2 million increase in services.
General and Administrative Expense
General and administrative expense increased by$38.8 million in the six months endedJune 30, 2022 compared to the same period in 2021. The increase was primarily attributable to an increase of$35.1 million in stock-based compensation costs, mainly for RSUs that vested or began vesting upon the closing of the Business Combination. The remaining increase was due to a$2.1 million increase in insurance costs as a result of the Business Combination, a$0.9 million increase in personnel and related fringe costs, a$0.5 million increase in services and a$0.2 million increase in a settlement liability.
Interest Expense, Net and Other Income (Expense), Net
Six Months Ended June 30,
2022 2021 $ Change % Change
($ in thousands)
Interest expense, net $ (40,054 ) $ (8,961 ) $ (31,093 ) 347 %
Other income (expense), net $ (9,982 ) $ (4,984 ) $ (4,998 ) 100 %
Interest expense, net increased $31.1 million in the six months ended June 30,
2022 compared to the same period in 2021. The increase was primarily attributed
to $36.7 million of interest expense recognized on the conversion of the 2023
Notes (as defined below) to equity at closing of the Business Combination,
partially offset by a $5.6 million decrease related to the extinguishment of
debt in 2022.
Other income (expense), net increased
35
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increase consisted of a
Income Taxes
Six Months Ended June 30,
2022 2021 $ Change % Change
($ in thousands)
Loss before income taxes $ (130,350 ) $ (35,171 ) $ (95,179 ) 271 %
Provision for income taxes $ (6 ) $ (10 ) $ 4 -40 %
We are subject to income taxes in the United States , China , Japan , UK , Germany
and Canada . The change in the provision for income taxes during the six months
ended June 30, 2022 , as compared to six months ended June 30, 2021 , was
immaterial.
Liquidity and Capital Resources
Since Legacy Quanergy's inception, it has financed operations primarily through the sale of shares of common stock, preferred stock, and convertible notes.
As a result, we have incurred negative cash flows from operating activities and significant losses from operations in the past as reflected in our accumulated deficit of$438.0 million as ofJune 30, 2022 . We expect to continue to incur operating losses for at least the next 12 months due to the investments that we intend to make in our business and, as a result, we may require additional capital resources to grow our business. InMarch 2018 andJune 2018 , we received$24.8 million and$0.7 million , respectively, through issuance of convertible promissory notes (the "2022 Notes") to various investors. The 2022 Notes were secured by a security agreement and were due inMarch 2022 . The principal amount accrued interest at 1.5% per annum, payable biannually, and additional interest at 8.0% per annum, which added to the principal and compounded on each payment date. The 2022 Notes were repaid at closing of the Business Combination. In 2020, we issued convertible promissory notes of approximately$8.1 million inMarch 2020 ,$7.5 million inAugust 2020 and$0.5 million inOctober 2020 to various investors, that were due inMarch 2023 (the "2023 Initial Notes"). In conjunction with the 2023 Initial Notes, we issued 3,527,241 common stock warrants. We issued additional convertible promissory notes of approximately$48.7 million inFebruary 2021 to various investors, which also mature inMarch 2023 (the "Extension Notes", together with the "2023 Initial Notes", the "2023 Notes"). In conjunction with the Extension Notes, we issued 6,298,306 common stock warrants inFebruary 2021 . In connection with the Business Combination, the principal amount and deferred interest on the 2023 Notes were converted into 14,464,992 shares of our Common Stock. As ofJune 30, 2022 , we had$18.7 million of cash and cash equivalents. Further, we completed the Business Combination onFebruary 8, 2022 , and effectively settled our outstanding debt balance of$106 million , thereby providing us with additional future financial flexibility. The Business Combination also gives the Company access to$125 million from a previously announced share subscription facility from GEM. OnMay 25, 2022 , we received$9.9 million in cash under the subscription facility in exchange for ultimate settlement of 25.1 million shares of Common Stock. Our long-term capital requirements will depend on many factors including timing and extent of spending to support research and development efforts as well as general and administrative activities for the business. We may in the future enter into arrangements to acquire or invest in related products, technologies, software and services, and we may need to seek additional equity or debt financing, which may not be available on terms acceptable to us. As ofJune 30, 2022 , there were future minimum lease payments of$0.1 million .
The following table shows our cash flows from operating activities, investing activities and financing activities for the presented periods:
Six Months Ended June 30,
2022 2021
($ In thousands)
Net cash provided by (used in)
Operating activities $ (33,329 ) $ (14,466 )
Investing activities (431 ) (5 )
Financing activities 26,391 48,679
Effect of exchange rate changes (18 ) (6 )
$ (7,387 ) $ 34,202
36--------------------------------------------------------------------------------
Operating Activities
For the six months endedJune 30, 2022 , operating activities used$33.3 million in cash. The primary factors affecting our operating cash flows during this period were our net loss of$130.4 million , offset by our non-cash charges of$109.1 million , primarily consisting of stock-based compensation of$56.8 million , non-cash interest expense of$40.1 million , non-cash expense of$10.0 million related to changes in derivative fair values, non-cash bonus expense of$1.4 million , depreciation and amortization of$0.5 million and$0.3 million of non-cash lease expense. In the six months endedJune 30, 2022 , we also paid$9.3 million of interest in cash on the 2022 Notes. The net cash used from changes in our operating assets and liabilities was$2.7 million . This amount consists of$4.9 million of cash used from changes primarily in our operating assets, due to a$2.3 million increase in inventory, a$1.9 million increase in prepaid expenses and other current assets, a$0.4 million decrease in other current liabilities, a$0.2 million increase in accounts receivable and a$0.1 million decrease in accrued expenses, offset by cash provided from changes in our operating liabilities consisting of a$1.8 million increase in accounts payable, a$.3 million increase in accrued settlement liabilities and a$0.1 million increase in other long term liabilities. For the six months endedJune 30, 2021 , operating activities used$14.5 million in cash. The primary factors affecting our operating cash flows during this period were our net loss of$35.2 million , offset by our non-cash charges of approximately$21.4 million primarily consisting of stock-based compensation of$7.3 million , non-cash interest expense of$8.7 million , change in fair value of derivative liabilities of$7.5 million , a$2.5 million gain on the extinguishment of debt and depreciation and amortization of$0.5 million . The net cash used from changes in our operating assets and liabilities was$0.7 million . This amount consists of$2.3 million of cash used from changes in our operating assets and liabilities of$2.3 million which primarily consists of a$1.8 million increase in other long-term assets, a$0.3 million decrease in other long term liabilities and a$0.2 million decrease in accrued expenses, offset by$1.5 million of cash provided from changes in our operating assets and liabilities, primarily due to a$0.6 million increase in accounts payable, a$0.4 million decrease in inventory, a$0.3 million decrease in accounts receivable and$0.2 million decrease in prepaid expenses,
Investing Activities
Net cash used in investing activities for the six months endedJune 30, 2022 was$0.4 million and consisted of purchases of machinery and equipment for use in manufacturing operations. Net cash used in investing activities for the six months endedJune 30, 2021 was immaterial.
Financing Activities
During the six months endedJune 30, 2022 , cash provided by financing activities was$26.4 million , primarily consisting of net proceeds from the Business Combination and sale of the PIPE Shares of$50.4 million ,$9.9 million in proceeds from the draw down of the GEM Agreement and$0.1 million in proceeds from the exercise of warrants and options, offset by the repayment of the 2022 Notes of$25.8 million and payment of offering costs of$8.2 million . During the six months endedJune 30, 2021 , cash provided by financing activities was$48.7 million , consisting of net proceeds from the issuance of convertible notes of$48.6 million and proceeds of$74 thousand from exercises of stock options.
Off-Balance Sheet Arrangements
As of
Critical Accounting Policies and Significant Management Estimates
Our discussion and analysis of operating results and financial condition are based upon our financial statements. The preparation of our financial statements in accordance withU.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, sales, expenses and related disclosures of contingent assets and liabilities. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. See "Part I, Item 1, Note 2 - Summary of Significant Accounting Policies" and "Note 13 - Leases" included in this Quarterly Report on Form 10-Q for a discussion of a recently adopted accounting pronouncement that affects our accounting for lease obligations. During the six months endedJune 30, 2022 , there have been no other material changes to our critical accounting policies from the ones described under the section Critical Accounting Policies and Estimates of Management's Discussion and Analysis of Financial Condition and Results of Operations and Summary of Significant Accounting Policies in the notes to the audited consolidated financial statements filed as Exhibit 99.2 and Exhibit 99.1, respectively, to the Company's Form 8-K/A filed with theSEC onMarch 31, 2022 . 37 --------------------------------------------------------------------------------
Recent Accounting Pronouncements
See "Note 1 - Recently Adopted Accounting Pronouncements" in our condensed financial statements included elsewhere in this Quarterly Report on Form 10-Q.
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