SPI ENERGY CO., LTD. You should read the following discussion and analysis in conjunction with our financial statements and the related notes appearing elsewhere in this annual report on Form 10-K. This discussion may contain forward-looking statements based on current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under " Item 1A.- Risk Factors " or in other parts of this annual report on Form 10-K. A. Operating Results We are a global provider of photovoltaic (PV) and electric vehicle (EV) solutions for business, residential, government and utility customers and investors. We develop solar PV projects which are either sold to third party operators or owned and operated by us for selling of electricity to the grid in multiple countries inAsia ,North America andEurope . InAustralia , we primarily sell solar PV components to retail customers and solar project developers. We started to engage in sales and leasing of new zero-emission EVs inU.S. from 2020, engage in roofing and solar energy systems installation inU.S. from 2021 and also started to assemble solar modules for sale inU.S. in 2022. Our liquidity position has deteriorated since 2015. We suffered net losses of$44.8 million and$33.7 million for the years endedDecember 31, 2021 and 2022, respectively. We also had an accumulated deficit of$670.8 million and a working capital deficit of$107.7 million as ofDecember 31, 2022 . For a detailed discussion, please see " Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations -B. Liquidity and Capital Resources-Capital Resources and Material Known Facts on Liquidity." Our operating results for future periods are subject to numerous uncertainties and it is uncertain if we will be able to reduce or eliminate our net losses for the foreseeable future. We have developed a plan to continue implementing various measures to boost revenue and control the cost and expenses within an acceptable level. Such measures include: 1) negotiate with potential buyers on PV solar projects; 2) negotiate for postponing of convertible bond payments; 3) improve the profitability of the business inthe United States ; 4) proactively implement a robust capital market strategy that includes both debt and equity offerings to meet the Group's financing needs; 5) strictly control and reduce business, marketing and advertising expenses and 6) seek for certain credit facilities. If we fail to achieve these goals, we may need additional financing to repay debt obligations and execute our business plan, and we may not be able to obtain the necessary additional capital on a timely basis, on acceptable terms, or at all. In the event that financing sources are not available, or that we are unsuccessful in increasing our gross profit margin and reducing operating losses, we may be unable to implement our current plans for expansion, repay debt obligations or respond to competitive pressures, any of which would have a material adverse effect on our business, financial condition and results of operations and may materially adversely affect our ability to continue as a
going concern. 85
Principal Factors Affecting Our Results of Operations
We believe that the following factors have had, and we expect that they will continue to have, a significant effect on the development of our business, financial condition and results of operations.
COVID-19 The continued effects of the COVID-19 pandemic and measures taken in response by governments and businesses worldwide to contain its spread have adversely impacted and may continue to adversely impact our supply chain, manufacturing, logistics, workforce and operations, as well as the operations of our suppliers, dealers and customers. There is continued uncertainty regarding the duration, scope and severity of the pandemic, particularly with the emergence of new variants of COVID-19 and periodic spikes in COVID-19 cases in various geographic regions, and the impacts on our business and the global economy from the effects of the pandemic and response measures. Our operating results substantially depend on revenues derived from sales of PV project assets, provision of electricity, our Australian subsidiary's trading of PV components, and ourU.S. subsidiary's business on roofing and solar energy systems installation, sales and leasing of EVs, sales of forklift and sales of solar modules, respectively. Travel and logistics restrictions, lockdowns, vaccine requirements and other measures from time to time implemented by foreign and domestic authorities have resulted in, and may continue to result in, supply chain and transportation disruptions, production delays and capacity limitations for the Company and some of our suppliers, dealers and customers, as well as reduced workforce availability or productivity, and additional data, information and cyber security risks associated with an extensive workforce working remotely. The degree to which the pandemic ultimately impacts our business, financial condition and results of operations and the global economy will depend on future developments beyond our control, which are highly uncertain and difficult to predict, including the severity, duration and any resurgence of the pandemic, the extent, duration and effectiveness of periodic lockdowns and other containment actions, the availability, public adoption and efficacy of COVID-19 vaccines, how quickly and to what extent normal economic and operating activity can resume, and the severity and duration of resulting global economic volatility. We believe the most significant elements of uncertainty are the intensity and duration of the impact by our customers, partners, service providers or suppliers as well as the ability of our sales channels, supply chain, manufacturing, and distribution to continue to operate with minimal disruption, all of which could negatively impact our financial position, results of operations, cash flows and outlook. Market Demand
Our revenue and profitability depend substantially on the demand for our PV
solutions, which is driven by the economics of PV systems, including the
availability and size of government subsidies and other incentives, government
support, cost improvements in solar power, as well as environmental concerns and
energy demand. The world PV market in terms of new annual installations is
expected to grow significantly in the next five years, providing engineering
procurement construction ("EPC") service providers and solar project developers
like us with significant opportunities to grow our business.
86
In the long term, as PV technology advances and the average system costs of solar projects decrease, we expect the market for electricity in a growing number of countries to achieve grid parity. As the PV industry becomes more competitive against other energy industries and widespread grid parity strengthens demand for solar projects, we expect our costs of sales to decrease and our revenue and profitability to increase.
In addition, the medium-duty EV market is expected to grow significantly over the next decade and there are many key factors are shaping the industry for accelerated growth over the next few years. Key factors driving this growth include government regulations requiring fleets to go electric, incentives and grant funding supporting commercial zero emission vehicle deployments, infrastructure deployments and corporate electrification mandates. Many large fleets who operate large truck and bus fleets have committed to go 100% electric over the next few years. This includes large delivery truck fleets like Amazon, FedEx,UPS , DHL,IKEA ; also shuttle bus operators like transit agencies inLos Angeles ,Orange County , andNew York ; and large corporate fleet owners likeGenentech , Microsoft and Salesforce. All of the above factors, together with key technology catalysts, are expected to spur demand for medium-duty electric vehicles significantly over the next few years. Key technology drivers include reduction in battery costs and costs of other key components, making electric vehicles cheaper, and advances in EV drivetrain technology, including motor improvements that enable better performance and higher efficiencies; and refinements in high-voltage battery technology. The anticipated sales growth in this segment of the EV market is attributed both to new companies that started as electric vehicle manufacturers, as well as and conventional OEMs who are expected to start offering complete EV over the next few years. As PV and energy storage technology advances and the average system costs decrease, in many cases the residential or small business owners of solar systems have effectively achieved grid parity for their systems. Aided by smart meter and virtual power plant technologies such systems can be an attractive alternative to electricity grid in many localities. We expect traditionally strong residential solar markets such asCalifornia andAustralia to continue to grow. We anticipate capturing scale economies as the overall solar power market grows, and expect our cost of sales to decrease and our revenue and profitability to increase.
Government Subsidies and Incentive Policies
We believe that the growth of the solar power industry in the short term will continue to depend largely on the availability and effectiveness of government incentives for solar power products and the competitiveness of solar power in relation to conventional and other renewable energy resources in terms of cost. Countries inEurope , notablyItaly ,Germany ,France ,Belgium andSpain , certain countries inAsia , includingJapan ,India andSouth Korea , as well asAustralia andthe United States have adopted favorable renewable energy policies. Examples of government sponsored financial incentives to promote solar power include capital cost rebates, tax credits, net metering and other incentives to end users, distributors, project developers, system integrators and manufacturers of solar power products. Governments may reduce or eliminate existing incentive programs for political, financial or other reasons, which will be difficult for us to predict. Electric utility companies or generators of electricity from fossil fuels or other renewable energy sources could also lobby for a change in the relevant legislation in their markets to protect their revenue streams. Government economic incentives could be reduced or eliminated altogether. With growing emphasis on improving air quality around our communities, large states likeCalifornia are mandating key end user segments to switch to zero emission transportation options. Some of the key regulations driving growth in our addressable market include:
· requiring all transit buses in
· requiring all airport shuttles in
· requiring at least 50% of all medium-duty trucks sold in
by 2030,
· requiring specific end user segments like drayage and yard trucks to go
electric. 87
Other states likeNew York ,New Jersey andMassachusetts are also expected to bring in regulatory requirements for key end user segments like, transit agencies and school buses to switch to all electric transportation options. Fifteen other states includingConnecticut ,Colorado ,Hawaii ,Maine ,Maryland ,Massachusetts ,New Jersey , NewYork, North Carolina ,Oregon, Pennsylvania ,Rhode Island ,Vermont , andWashington have committed to followCalifornia's Advanced Clean Trucks Regulation. Primarily driven by the urgent need to meet carbon and greenhouse gas emission reduction targets, various state and federal agencies are also supporting the switch to zero emission transportation, providing a host of funding and incentive support to develop, demonstrate and deploy zero emission transportation solutions. Some of the key funding / incentives driving adoption of electric medium duty vehicles include:
· the California Hybrid and Zero-Emission Truck and Bus Voucher Incentive
Project, which offers a minimum of
electric vehicles registered and operating in the state;
· the New York Truck Voucher Incentive Program offering up to
4 electric vehicle;
· funding from federal agencies like the
up to 80% of the cost of procuring electric transit buses and various funding
options covering up to 100% of the cost of procuring all electric school buses
across key states.
· Federal and various state agencies have established incentives for setting up
both public and private charging infrastructure. Notably, the California Energy
Commission and the
up to 100% of the cost of setting up chargers and related infrastructure. Large
utilities like Southern California Edison, Pacific Gas & Electric and
Gas & Electric have 'Charge Ready' programs that cover the entire cost of
setting up charging infrastructure. Other states like
Carolina,
fleets with their charging infrastructure requirements.
Our
Our financial condition and results of operations depend on our ability to successfully continue to develop new solar projects and operate our existing solar projects. We expect to build and manage a greater number of solar projects, which we expect to present additional challenges to our internal processes, external construction management, working capital management and financing capabilities. Our financial condition, results of operations and future success depend, to a significant extent, on our ability to continue to identify suitable sites, expand our pipeline of projects with attractive returns, obtain required regulatory approvals, arrange necessary financing, manage the construction of our solar projects on time and within budget, and successfully operate solar projects.
Selected Statement of Operations Items
Revenue Our revenue for the years endedDecember 31, 2021 and 2022 was mainly derived from sales of PV components, roofing and solar energy systems installation, electricity revenue with Power Purchase Agreements ("PPAs"), sales of PV project assets, sales and leasing of EVs and others.
The following table sets forth a breakdown of our revenue from continuing operation by category of activities for the periods indicated:
For the years ended December 31,
2021 2022
($ in thousands except percentage)
Sales of PV components $ 123,138 76.0% $ 133,930 75.5%
Roofing and solar systems installation 29,028 17.9% 25,899 14.6%
Electricity revenue with PPAs 4,587 2.8% 5,725 3.2%
Revenue from sales and leasing of EV 2,336 1.4% 2,340 1.3%
Others 2,904 1.9% 9,624 5.4%
$ 161,993 100.0% $ 177,518 100.0%
88
Cost of Revenues
Our cost of revenues consist primarily of direct purchase price of PV
components, raw materials and labor cost. In the years ended December 31, 2021
and 2022, we had cost of revenues of $151.4 million and $163.0 million fromour operation, respectively. Operating Expenses In the years endedDecember 31, 2021 and 2022, our operating expenses consisted of (1) general and administrative expenses, (2) sales, marketing and customer service expenses, (3) provision for credit losses and (4) impairment charges. General and administrative expenses. Our general and administrative expenses primarily consist of salaries and share-based compensation expense, professional service fees, rental and office supplies expenses. In the years endedDecember 31, 2021 and 2022, our general and administrative expenses were$41.8 million and$35.6 million , respectively. Sales, marketing and customer service expenses. Our sales, marketing and customer service expenses consist primarily of advertising expense, amortization of intangible assets and salaries. In the years endedDecember 31, 2021 and 2022, our sales, marketing and customer service expenses were$7.6 million
and$5.0 million , respectively.
Provision for credit loss. In the years ended
Impairment charges. Our impairment charges consist of impairment charges for long-lived assets. In the years endedDecember 31, 2021 and 2022, our impairment charges were nil and$2.0 million , respectively. Other Income (Expense) In the year endedDecember 31, 2021 , our other income (expense) includes interest expenses, net, net foreign exchange gain, gain on forgiveness of PPP loan, change in fair value of derivative liability and others. In the year endedDecember 31, 2022 , our other income (expense) includes interest expenses, net, loss on extinguishment of convertible bonds, change in fair value of derivative liability, net foreign exchange gain, gain on forgiveness of PPP loan and others. Interest expense. Our interest expense arises from borrowings and amortization of debt discount of convertible bonds. In the years endedDecember 31, 2021 and 2022, our interest expense was$5.1 million and$7.2 million , respectively.
Income Tax
The following table sets forth our loss before income taxes to the relevant geographic locations for the periods indicated:
For the year ended December 31,
2021 2022
($ in thousands except percentage)
United States $ (45,860 ) $ (35,269 )
Foreign 2,480 3,538
Total $ (43,380 ) $ (31,731 )
89
Cayman Islands
We are incorporated in the Cayman Islands . Under the current laws of the Cayman
Islands , we are not subject to income or capital gains tax in the Cayman
Islands . Payments of dividends and capital in respect of our Shares will not be
subject to taxation in the Cayman Islands and no withholding will be required on
the payment of a dividend or capital to any holder of our Shares, nor will gains
derived from the disposal of our Shares be subject to Cayman Islands income or
corporation tax. The Cayman Islands currently have no income, corporation or
capital gains tax and no estate duty, inheritance tax or gift tax.
United States Based onFinancial Accounting Standards Board ("FASB") staff Q&A Topic 740, No. 5, Accounting for Global Intangible Low-Taxed Income (GILTI), the FASB staff noted that the Company must make an accounting policy election to either (1) recognize taxes due on futureU.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the "period cost method") or (2) factor such amount into the Company's measure of its deferred taxes (the "deferred method"). The Company elected to treat GILTI as a current-period expense when incurred. The Company has not recognized GILTI expense for the year endedDecember 31, 2022 as there were either no earnings from controlled foreign corporations or the "hightax" exclusion applied.Hong Kong
According to Tax (Amendment) (No. 3) Ordinance 2018 published byHong Kong government, formApril 1, 2018 , under the two-tiered profits tax rates regime, the profits tax rate for the firstHKD2 million of assessable profits will be lowered to 8.25% (half of the rate specified in Schedule 8 to the Inland Revenue Ordinance (IRO)) for corporations. No provision forHong Kong tax has been made in our consolidated financial statements, as ourHong Kong subsidiary had not generated any assessable income for the years endedDecember 31, 2021 and 2022. Our subsidiaries incorporated inHong Kong were exempted from theHong Kong income tax on its foreign-derived income and there were no withholding taxes inHong Kong on the remittance of dividends. See " Item 1. Business - Taxation" for more information.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted inthe United States of America , which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements, the reported amounts of revenues and expenses during the reporting periods and the related disclosures in the consolidated financial statements and accompanying footnotes. Out of our significant accounting policies, which are described in Note 3-Summary of Significant Accounting Policies of our consolidated financial statements included elsewhere in this Form 10-K, 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. 90 Revenue Recognition Our accounting practices under Accounting Standards Codification ("ASC") No. 606, "Revenue from Contracts with Customers" ("ASC 606" or "Topic 606") are
as followings:
We generate revenue from sales of PV components, roofing and solar systems installation, electricity revenue with Power Purchase Agreements ("PPAs"), sales of PV project assets, sales and leasing of EVs and others.
Sale of PV components. Revenue on sale of PV components includes one performance obligation of delivering the products and the revenue is recognized at a point in time following the transfer of control of such products to the customer, which typically occurs upon shipment or acceptance of the customer depending on the terms of the underlying contracts. Roofing and solar systems installation. Revenue from roofing and solar energy system installation is recognized over time. For revenue from solar energy system installation, our only performance obligation is to design and install a customized solar energy system, or to reinstall the customer's existing solar energy system. For revenue from roofing, our only performance obligation is to design and build the roof system per customer specifications. Our roofing projects involve the construction of a specific roof systems in accordance with each customer's selection; our solar energy system installations involve solar modules being retrofitted to existing consumer roofs using rails, then connected to the utility using an inverter system. For both solar energy system installation and roofing, typically jobs are completed within three months, the specific timing depends on the size of the job and the complexity of the job site, and the contract price includes all material and labor needed, and payments are collected based on specific milestones. We provide solar energy systems and roofing installation for various customers, such as homeowners and real estate developers, but the design and installation for each customer differs substantially on the basis of each customer's needs and the type of shingle or roof that is placed with the solar energy system. The asset consequently has no alternative use to us because the customer specific design limits our practical ability to readily direct the solar energy system to another customer. As such our performance does not create an asset with an alternative use to us. Pursuant to the contract, the customers agree to pay for any costs, expenses and losses incurred by us upon termination, and therefore, revenue is recognized over time according to ASC 606-10-25-27(c).
For both solar energy system installation and roofing, all costs to obtain and fulfill contracts associated with system sales and other product sales are expensed to cost of revenue when the corresponding revenue is recognized.
The Group recognizes revenue using a cost-based input method that recognizes revenue and gross profit as work is performed based on the relationship between actual costs incurred compared to the total estimated cost of the contract, to determine our progress towards contract completion and to calculate the corresponding amount of revenue and gross profit to recognize. The total estimated cost of the contract constitutes of material cost and labor cost, and are developed based on the size and specific situation of different jobs. Changes in estimates mainly due to: (i) unforeseen field conditions that impacts the estimated workload, and (ii) change of the unit price of material or labor cost. If the estimated total costs on any contract are greater than the net contract revenues, we recognize the entire estimated loss in the period the loss becomes known. Electricity revenue with PPAs. We sell energy generated by PV solar power systems under PPAs. For energy sold under PPAs, we recognize revenue each period based on the volume of energy delivered to the customer (i.e., the PPAs off-taker) and the price stated in the PPAs. We have determined that none of the PPAs contains a lease since (i) the purchaser does not have the rights to operate the PV solar power systems, (ii) the purchaser does not have the rights to control physical access to the PV solar power systems, and (iii) the price that the purchaser pays is at a fixed price per unit of output. 91 Sale of PV project asset. Our sales arrangements for PV projects do not contain any forms of continuing involvement that may affect the revenue or profit recognition of the transactions, nor any variable considerations for energy performance guarantees, minimum electricity end subscription commitments. The Company therefore determined its single performance obligation to the customer is the sale of a completed solar project. We recognize revenue for sales of solar projects at a point in time after the solar project has been grid connected and the customer obtains control of the solar project. Revenue from sales and leasing of EV. We recognize revenue from sales of EV at a point in time following the transfer of control of such products to the customer, which typically occurs upon the delivery to the customer for EV sales. We determined that the government grants related to sales of EV should be considered as part of the transaction price because it is granted to the EV buyer and the buyer remains liable for such amount in the event the grants were not received by us or returned due to the buyer violates the government grant terms and conditions. EV leasing revenue includes revenue recognized under lease accounting guidance for direct leasing programs. We account for these leasing transactions as operating leases under ASC 842 Leases, and revenues are recognized on a straight-line basis over the contractual term. Other revenue. Other revenue mainly consist of sales of self-assembled solar modules, sales of component and charging stations, sales of forklifts, engineering and maintenance service, shipping and delivery service, sales of pre-development solar projects and others. Other revenues are recognized at a point in time following the transfer of control of such service or products to the customer, which typically occurs upon shipment of product or acceptance of the customer depending on the terms of the underlying contracts.
Impairment of Long-lived Assets
Our long-lived assets include property, plant and equipment, project assets, right-of-use assets and other intangible assets with finite lives. We evaluate long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset or asset group be tested for possible impairment, we first compare undiscounted cash flows expected to be generated by that asset or asset group from its use and eventual disposition to its carrying amount. If the carrying amount of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying amount exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary. Any impairment write-downs would be treated as permanent reductions in the carrying amounts of the assets and a charge to statement of operations would be recognized. We review project assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. We consider a project commercially viable or recoverable if it is anticipated to be sold for a profit once it is either fully developed or fully constructed. We consider a partially developed or partially constructed project commercially viable or recoverable if the anticipated selling price is higher than the carrying value of the related project assets. We examine a number of factors to determine if the project is expected to be recoverable, including whether there are any changes in environmental, permitting, market pricing, regulatory, or other conditions that may impact the project. Such changes could cause the costs of the project to increase or the selling price of the project to decrease. If a project is not considered recoverable, we impair the respective project assets and adjust the carrying value to the estimated fair value. The judgments and estimates involved in identifying and quantifying the impairment of long-lived assets involve inherent uncertainties, and the measurement of the fair value is dependent on the accuracy of the assumptions used in making the estimates and how those estimates compare to our future operating performance. We evaluate long-lived assets for impairment and record an impairment charge of$2.0 million , for impairment of project assets and right of use assets for the year endedDecember 31, 2022 . For the year endedDecember 31, 2021 , there were no impairment charges recorded related to long-lived assets. 92 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 cost method. The cost of finished goods is determined on the basis of weighted average and comprises direct materials, direct labor and an appropriate proportion of overhead. Net realizable value is based on estimated selling prices less selling expenses and any further costs expected to be incurred for completion. Adjustments to reduce the cost of inventory to net realizable value are made, if required, for estimated excess, obsolescence, or impaired balances if any. We evaluate the recoverability of our inventories based on assumptions about expected demand and market conditions. Our assumption of expected demand is developed based on our analysis of sales backlog, market forecast, and competitive intelligence. Our assumption of expected demand is compared to available inventory, production capacity, available third-party inventory,
and growth plans.
During the years endedDecember 31, 2021 and 2022, inventories were written down by$1.0 million and$0.1 million , respectively, to reflect the lower of cost or net realizable value. Share-Based Compensation Our share-based payment transactions with employees, such as restricted shares and share options, are measured based on the grant-date fair value of the equity instrument granted. The fair value of the award is recognized as compensation expense, net of estimated forfeitures, over the period during which an employee is required to provide service in exchange for the award on a straight line basis, which is generally the vesting period. Forfeitures are required to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. We estimate the fair value of service-based stock options granted using the Black-Scholes option-pricing formula, which requires the use of highly subjective and complex assumptions. If we had made different assumptions, our stock-based compensation expense, net loss and net loss per share of common stock could have been significantly different. See Note 19 to our audited financial statements included elsewhere in this Annual Report for information concerning certain of the specific assumptions we used in applying the Black-Scholes option pricing model to determine the estimated fair value of our stock options granted during the years endedDecember 31, 2021 and 2022.
Accounts Receivables and Allowance for Credit Losses
We grant open credit terms to credit-worthy customers. Accounts receivable are
primarily related to the Group's sales of PV components, revenue from roofing
and solar energy systems installation, electricity revenue with PPA, sales of
solar modules and sales of EVs and forklifts.
We maintain allowances for credit losses for estimated losses resulting from the
inability of our customers to make required payments. Accounts receivable is
considered past due based on its contractual terms. In establishing the
allowance, management considers historical losses, the financial condition, the
accounts receivables aging, the payment patterns and the forecasted information
in pooling basis upon the use of the Current Expected Credit Loss Model ("CECL
Model") in accordance with ASC topic 326, Financial Instruments - Credit Losses.
Accounts receivable that are deemed to be uncollectible are charged off against
the allowance after all means of collection have been exhausted and the
potential for recovery is considered remote. There is a time lag between when
the Company estimates a portion of or the entire account balances to be
uncollectible and when a write off of the account balances is taken. We do not
have any off-balance-sheet credit exposure related to our customers.
Contractually, we may charge interest for extended payment terms and require
collateral.
Provision for credit losses is
93Goodwill Goodwill represents the excess of the purchase consideration over the fair value of the identifiable tangible and intangible assets acquired and liabilities assumed of the acquired entity as a result of our acquisitions of interests in our subsidiaries.Goodwill is not amortized but is tested for impairment on an annual basis, or more frequently if events or changes in circumstances indicate that it might be impaired. We have an option to first assess qualitative factors to determine whether it is necessary to perform the quantitative goodwill impairment test. In the qualitative assessment, we consider primary factors such as industry and market considerations, overall financial performance of the reporting unit, and other specific information related to the operations. Based on the qualitative assessment, if it is more likely than not that the fair value of each reporting unit is less than the carrying amount, the quantitative impairment test is performed. In performing the quantitative impairment test, we compare the fair values of each reporting unit to its carrying amount, including goodwill. 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, we recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value; the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Application of a goodwill impairment test requires significant management judgment, including the identification of reporting units, assigning assets, liabilities and 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.
We tested goodwill for impairment as of
Derivative Instruments We evaluate our convertible debt to determine if the contract or embedded component of the contract qualifies as derivatives to be separately accounted for in accordance with ASC 480, "Distinguish by Liabilities from Equity", and ASC 815, "Derivatives and Hedging". The result of this accounting treatment is that the fair value of the embedded derivative, if required to be bifurcated, is marked-to-market at each balance sheet date and recorded as a liability. The change in fair value is recorded in the consolidated statement of operations. Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity. Derivative liability as ofDecember 31, 2021 and 2022 is nil and$3.4 million , respectively, with the change in fair value of$67 thousands and negative$0.2 million recorded in the consolidated statements of operations for the years endedDecember 31, 2021 and 2022, respectively. Income Taxes
We account for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recognized if it is more likely than not that some portion, or all, of a deferred tax asset will not be realized. 94 We recognize in the consolidated financial statements the impact of a tax position, if that position is more likely than not of being sustained upon examination, based on the technical merits of the position. In evaluating whether a tax position has met the more-likely-than-not recognition threshold, management presumes that the position will be examined by the appropriate taxing authority that has full knowledge of all relevant information. In addition, a tax position that meets the more-likely-than-not recognition threshold is measured to determine the amount of benefit to be recognized in the financial statements. The tax position is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon settlement. Our tax liability associated with unrecognized tax benefits is adjusted periodically due to changing circumstances, such as the progress of the tax audits, case law developments and new or emerging legislation. Such adjustments are recognized entirely in the period in which they are identified. We record interest and penalties related to an uncertain tax position, if and when required, as part of income tax expense in the consolidated statements of operations. No reserve for uncertain tax positions was recorded for the years endedDecember 31, 2022 and 2021. We do not expect that the assessment regarding unrecognized tax positions will materially change over the next 12 months. We are not currently under examination by an income tax authority, nor have been notified that an examination is contemplated.
Recent Accounting Pronouncements
Recently Adopted Accounting Standards
See Note 3 "Summary of Significant Accounting Policies" to our consolidated financial statements for a description of recently issued or adopted accounting pronouncements that may potentially impact our financial position, results
of operations or cash flows. Recent Financing Activities
InFebruary 2021 , the Company offered and sold 1,365,375 ordinary shares in a registered direct offering to certain institutional investors at a purchase price of$10.79 per ordinary share for$13.6 million , net of direct offering cost of$1.1 million . InFebruary 2021 ,June 2021 ,September 2021 ,November 2021 , the Company sold Convertible Promissory Notes to an investor for consideration of approximately$4.21 million each and$16.84 million in total, convertible into ordinary shares of the Company at a conversion price of$20.00 per share. The Convertible Promissory Notes were offered and sold solely to the investor in a private placement in reliance on Regulation D promulgated under theU.S. Securities
Act of 1933, as amended.
InJune 2022 , Phoenix Motor Inc. ("Phoenix"), the parent company ofPhoenix Cars LLC andPhoenix Motorcars Leasing LLC , completed its initial public offering ("IPO") andPhoenix's shares have been listed on NASDAQ under the stock code "PEV" ("Phoenix IPO").Phoenix issued 2,100,000 ordinary shares at$7.5 per share. Net proceeds from the Phoenix IPO after deducting underwriting commissions, share issuance costs and offering expenses amounted to$13.4 million . InApril 2022 , the Company sold Convertible Promissory Notes to an investor for consideration of approximately$2.1 million convertible into ordinary shares of the Company at a conversion price of$20.00 per share. The Convertible Promissory Notes were offered and sold solely to the investor in a private placement in reliance on Regulation D promulgated under theU.S. Securities
Act of 1933, as amended.
InNovember 2022 ,Phoenix entered into a standby equity purchase agreement with YA II PN, LTD., aCayman Islands exempt limited partnership (the "Investor") to sell up to$10 million ofPhoenix's share of common stock from time to time. The selling price is 93% of the market price as defined in the agreement. Net proceeds from standby equity purchase agreement in 2022 amounted to$0.03 million .
In
95
Results of Operations
The following table sets forth a summary, for the periods indicated, of our
consolidated results of operations and each item expressed as a percentage of
our total net revenues. Our historical results presented below are not
necessarily indicative of the results that may be expected for any future
period.
December 31,
2021 2022
($ in thousands except percentage)
Net revenues $ 161,993 100.0 % $ 177,518 100.0 %
Cost of revenues 151,373 93.4 % 163,033 91.8 %
Gross profit 10,620 6.6 % 14,485 8.2 %
Operating expenses:General and administrative 41,780 25.8 % 35,554 20.0 % Sales, marketing and customer service 7,581 4.7 % 5,027 2.8 % Provision for credit losses 2,735 1.7 % 581
0.3 % Impairment charges on long-lived assets - - 1,955 1.1 % Total operating expenses 52,096 32.2 % 43,117 24.2 % Operating (loss) income (41,476 ) (25.6)% (28,632 ) (16.1)% Other income (expense): Interest expenses, net (5,137 ) (3.2)% (7,194 ) (4.1)% Loss on extinguishment of convertible bonds (2,634 ) (1. 5)% Change in fair value of derivative liability 67 0.0 % (183 ) (0.1)% Net foreign exchange gain 2,694 1.7% 2,564 1.4 % Forgiveness of PPP Loan 205 0.1% 5,095 2.9 % Others 267 0.2% (747 ) (0.5)% Total other expense, net (1,904 ) (1.2)% (3,099 ) (1.9)% Loss before income taxes (43,380 ) (26.8)% (31,731 ) (17.9)% Income taxes expense 1,454 0.9 % 1,992 1.1 % Net loss$ (44,834 ) (27.7)%$ (33,723 ) (19.0)%
Comparison of the year ended
Net revenues - Net revenues were$162.0 million and$177.5 million for the years endedDecember 31, 2021 and 2022, respectively, representing an increase of$15.5 million or 9.6%. The increase in net sales for the year endedDecember 31, 2022 over the comparative period was primarily due to revenue increase from sales of PV components of$10.8 million , Electricity revenue increase with PPAs of$1.1 million and revenue increase from sales of self-assembled solar modules, sales of component and charging stations, sales of forklifts and others of$6.7 million , partially net off by the decrease of revenue from roofing and solar systems installation of$3.1 million . Cost of revenues -Cost of revenues was$151.4 million (93.4% of net revenues) and$163.0 million (91.8% of net revenues) for the years endedDecember 31, 2021 and 2022, respectively, representing an increase of$11.7 million or 7.7%. The increase in cost of goods sold was in consistent with the increase of net revenues. Gross profit - Our gross profit increased from$10.6 million in the year endedDecember 31, 2021 to$14.5 million in the year endedDecember 31, 2022 . Gross margins were 6.6% and 8.2% for the years endedDecember 31, 2021 and 2022, respectively. The increase in gross margin was primarily due to we focused more on sales of battery and inverter instead of sales of panel in the year endedDecember 31, 2022 , where battery and inverter products have a higher GP ratio than panels. 96 General and administrative expenses - General and administrative expenses were$41.8 million (25.8% of net revenues) and$35.6 million (20.0% of net revenues) for the years endedDecember 31, 2021 and 2022, respectively, representing an decrease of$6.2 million , or 14.9%. The decrease was mainly due to the decrease in stock-based compensation expense and research and development expenses. Sales, marketing and customer service expenses - Sales, marketing and customer service expenses were$7.6 million (4.7% of net revenues) and$5.0 million (2.8% of net revenues) for the years endedDecember 31, 2021 and 2022, respectively, representing an decrease of$2.6 million , or 33.7%. The decrease was mainly due to the decrease of the amortization of customer list and work in process contracts purchased from the PDI acquisition in the year of 2021. Provision for credit loss - In 2021 and 2022, we accrued credit loss provision of$2.7 million (1.7% of net revenues) and$0.6 million (0.3% of net revenues), respectively. The decrease was mainly due to the reversal of provision for the accounts receivable generated from the business of roofing and solar energy systems installation in 2022. Impairment charges on long-lived assets -We accrued nil and$2.0 million impairment loss (1.1% of net revenues) for the years endedDecember 31, 2021 and 2022, respectively. The increase was due to impairment of our right-of-use assets in our renewable energy solutions segment and project assets in our solar projects development segment. Interest expense, net - Interest expense net was$5.1 million (3.2% of net revenues) and$7.2 million (4.1% of net revenues) for the years endedDecember 31, 2021 and 2022, respectively, representing an increase of$2.1 million , or 40.0%. The increase in interest expense was primarily due to amortization of debt discount of convertible bonds and interest accrued from new convertible bonds. Loss on extinguishment of convertible bonds -We recorded nil and$2.6 million impairment loss (1.5% of net revenues) for the year endedDecember 31, 2021 and 2022, respectively. The loss came from the extinguishment of the convertible bonds during the current year. Net foreign exchange gain - We had a net foreign exchange loss of$2.7 million (1.7% of net revenues) and a net foreign exchange gain of$2.6 million (1.4% of net revenues) for the years endedDecember 31, 2021 and 2022, respectively. The variance is mainly due the fluctuation of exchange rate for EUR/USD and AUD/USD. Forgiveness of PPP Loan - We generated Forgiveness of PPP Loan of$0.2 million (0.1% of net revenues) and$5.1 million (2.9% of net revenues) for the years endedDecember 31, 2021 and 2022. Income tax expense - We had a provision for income taxes of$1.5 million (0.9% of net revenues) and$2.0 million (1.1% of net revenues) for the years endedDecember 31, 2021 and 2022, respectively, representing an increase of$0.5 million , or 37.0%. The increase was mainly due to the increase in profit before tax of our subsidiary inAustralia . Net loss - For the foregoing reasons, we incurred a net loss of$33.7 million (19.0% of net revenues) for the year endedDecember 31, 2022 , representing a decrease of net loss of$11.1 million compared to a net loss of$44.8 million (24.8% of net revenues) for the year endedDecember 31, 2021 . 97 B. Liquidity and Capital Resources
Liquidity and Capital Resources
Historically, we have financed our operations primarily through cash flows from bank borrowings, financing from issuance of convertible bonds, operating activities, and the proceeds from private placements and registered offerings.
As of
We have recurring losses from operations. We have incurred a net loss of$33.7 million during the year endedDecember 31, 2022 . As ofDecember 31, 2022 , we had a working capital deficit of$107.7 million and the cash flow used in the operation activities for the year endedDecember 31, 2022 was$16.0 million . These conditions raise substantial doubt about the Company's ability to continue as a going concern. For the next 12 months from the issuance date of this report, we plan to continue implementing various measures to boost revenue and control the cost and expenses within an acceptable level. Such measures include: 1) negotiate with potential buyers on PV solar projects; 2) negotiate for postponing of convertible bond payments; 3) improve the profitability of the business inthe United States ; 4) proactively implement a robust capital market strategy that includes both debt and equity offerings to meet the Group's financing needs; 5) strictly control and reduce business, marketing and advertising expenses and 6) seek for certain credit facilities. If we fail to achieve these goals, we may need additional financing to repay debt obligations and execute our business plan, and we may not be able to obtain the necessary additional capital on a timely basis, on acceptable terms, or at all. In the event that financing sources are not available, or that we are unsuccessful in increasing our gross profit margin and reducing operating losses, we may be unable to implement our current plans for expansion, repay debt obligations or respond to competitive pressures, any of which would have a material adverse effect on our business, financial condition and results of operations and may materially adversely affect our ability to continue as a going concern. The consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded assets or the amounts and classification of liabilities or any other adjustments that might be necessary should we be unable to continue as a going concern. A summary of the sources and uses of cash and cash equivalents is as follows: For the year endedDecember 31, 2021 2022 ($ in thousands)
Net cash used in operating activities$ (27,484 ) $ (15,966 ) Net cash (used in) generated from investing activities (8,866 ) (8,157 ) Net cash generated from financing activities 18,425 17,304 Effect of exchange rate changes on cash (4,012 ) (39 ) Net decrease in cash, cash equivalents and restricted cash$ (21,937 ) $ (6,858 ) 98 Operating Activities
Net cash used in operating activities was$16.0 million for the year endedDecember 31, 2022 , primarily as a result of (i) net loss of$33.7 million , (ii) Gain on forgiveness of PPP loan of$5.1 million , (iii) increase in project assets of$1.8 million , (iv) increase in inventories of$6.8 million , (v) decrease in lease liability of$2.4 million ; and was partially offset by (i) increase in accounts payable of$5.7 million , (ii) increase in advance from customers of$4.2 million , (iii) increase in accrued liabilities and other liabilities of$4.6 million , (iv) increase in income taxes payable of$1.8 million and noncash adjustments mainly including (v) depreciation and amortization of$4.2 million , (vi) stock-based compensation expenses of$3.1 million , (vii) loss on extinguishment of convertible bonds of$2.6 million , (viii) impairment charges on long lived assets of$2.0 million , (ix) provision for prepaid and other current assets of$1.6 million , (x) amortization of right-of-use assets of$2.6 million , (xi) amortization of debt discount on convertible bond of$1.4 million . Net cash used in operating activities was$27.5 million for the year endedDecember 31, 2021 , primarily as a result of (i) net loss of$44.8 million , (ii) increase in project assets of$6.0 million , (iii) increase in inventories of$7.1 million , and (iv) increase in prepaid expenses and other assets of$4.6 million ; the decrease was partially offset by (i) increase in accounts payable of$8.5 million , (ii) increase in advance from customers of$3.6 million , (iii) increase in accrued liabilities and other liabilities of$4.0 million , and noncash adjustments mainly including (iv) depreciation and amortization of$7.3 million , (v) Provision for credit loss of$2.7 million , (vi) stock-based compensation expenses of$5.8 million . Investing Activities
Net cash used in investing activities was
Net cash used in investing activities was$8.9 million for the year endedDecember 31, 2021 , primarily as a result of the cash paid for asset purchase of PDI in the amount of$8.0 million and purchase of property, plant and equipment of$1.3 million , partially offset by proceeds from disposal of property and
equipment of$0.5 million . Financing Activities
Net cash generated from financing activities was$17.3 million for the year endedDecember 31, 2022 , primarily consisted of (i) proceeds from issuance of common stocks in private placement of$1.2 million , (ii) proceeds from IPO ofPhoenix of$13.4 million , (iii) proceeds from borrowings of$141.6 million , partially offset by repayment of convertible notes of$141.0 million , and (iv) proceeds from issuance of convertible bond of$2.0 million . Net cash generated from financing activities was$18.4 million for the year endedDecember 31, 2021 , primarily consisted of (i) proceeds from issuance of ordinary shares of$13.6 million , (ii) proceeds from issuance of convertible note of$16.0 million , (iii) net proceeds from line of credit and loans payable of$1.6 million and (iv) proceeds from exercise of options issued toLighting Charm Limited during disposition of SPI China of$1.1 million , partially offset by repayment of convertible notes of$13.9 million . Capital Expenditures
We incurred capital expenditures of
99 Trend information Our operating results substantially depend on revenues derived from s sales of PV project assets, provision of electricity, our Australian subsidiary's trading of PV components, and ourU.S. subsidiary's business on roofing and solar energy systems installation, sales and leasing of EVs, sales of forklift and sales of solar modules, respectively. The COVID 19 pandemic has created and continues to create various global macroeconomic, customer demand, operational and supply chain risks, any one of which could have an adverse impact on our business
going forward.
Other than as disclosed elsewhere in this prospectus, the following trends, uncertainties, demands, commitments or events for 2022 are reasonably likely to have a material effect on our net revenues, income, profitability, liquidity or capital resources, or that would cause reported consolidated financial information not necessarily to be indicative of future operating results or financial conditions:
· Inflation Reduction Act. The Inflation Reduction Act of 2022, or IRA, was
signed into law on
clean energy investments dramatically expands tax credits and incentives to
deploy more clean vehicles, including commercial vehicles, while supporting a
domestic EV supply chain and charging infrastructure buildout. IRA
transportation sector provisions will accelerate the shift to zero-emission
vehicles (ZEVs) by combining consumer and manufacturing policies. The IRA
extends the existing tax credit for electric vehicles and establishes a new
tax credit for used electric vehicles, as well as establishes a new tax credit
for commercial ZEVs. Under the IRA, commercial ZEVs will be eligible for a
federal tax credit of up to the lesser of 30% of the sales price or the
incremental cost of a comparable ICE-engine vehicle, capped at
vehicles under 14,000 pounds and
governmental entities may also be eligible to claim these credits. Vehicles'
final assembly must be in
credit, but commercial vehicles are exempt from the battery or mineral
sourcing requirements that apply to consumer electric vehicles. The federal
tax credit on charging equipment has been extended through 2032. For
commercial uses, the tax credit is 6% with a maximum credit of
unit. The equipment must be placed in a low-income community or non-urban
area. The
aforementioned credits. The announcement of the IRA and the delay in receiving
of customer orders during the fourth quarter of 2022 and the first quarter of
2023, as many existing or potential customers are waiting to place orders
until they are certain of the amount of tax credits available per ZEV. In
addition, many customers are evaluating the size and type of ZEV they intend
to purchase because the amount of the tax credit depends on the weight of the
vehicle, among other factors. Furthermore, other government programs, such as
the FTA's Low- and No-Emission Vehicle Program or certain state programs,
recently announced new funding and are in the process of making these funds
available for eligible purchases. Until these processes are established, we
believe, customer orders may be delayed.
· Supply-chain challenges. We have experienced significant delivery delays from
our suppliers from beginning of the COVID-19 pandemic through most of 2022. In
addition, we often do not get informed of delivery delays until or after the
expected delivery dates and have, at times, also experienced deliveries in
advance of expected delivery dates without prior notice (for orders that were
previously delayed), which does not allow for adequate planning. We have also
experienced shortages of chassis and other components. As a result of these
planning challenges, we have increased our inventory of raw materials and
critical components, such as chassis, batteries or motors, and added new
suppliers to optimize cost, minimize supply chain issues and prepare for an
increase in future production. However, adding new suppliers, especially for
chassis, increases requirements for working capital and places us at the mercy
of price volatility. We expect supply chain challenges will continue for the
foreseeable future.
Inflation and interest rates. We are experiencing cost increases due to
inflation resulting from various supply chain disruptions and other
disruptions caused by the COVID-19 pandemic and general global economicconditions. The cost of raw materials, manufacturing equipment, labor and
shipping and transportation has increased considerably. We expect higher than
recent years' levels of inflation to persist for the foreseeable future. If we
are unable to fully offset higher costs through price increases or other
measures, we could experience an adverse impact to our business, prospects,
financial condition, results of operations and cash flows. Interest rates have
also increased considerably. The increase in inflation and interest rates
impacts the demand for our EVs, as customers may delay purchasing and/or have
difficulty financing their purchases.
Off-Balance Sheet Arrangements
We have not entered into any financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our own shares and classified as shareholder's equity, or that are not reflected in our consolidated financial statements. 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 research and development services with us. 100
Tabular Disclosure of Contractual Obligations
The following table sets forth our contractual obligations as ofDecember 31, 2022 : Payment due by period less than more than 5 Contractual Obligations Total 1 year 1-3 years 3-5 years years ($ in thousands) Convertible bonds$ 45,236 $ 45,236 $ - $ - $ - Short-term borrowings 9,693 9,693 - - - Long-term debt obligations 6,968 371 897 5,566 134 Operating lease obligations 23,712 2,571 4,758 4,558 11,825 Consideration payable 61,617 61,617 - - - Due to an affiliate 10,548 10,548 - - - Total$ 157,774 $ 130,036 $ 5,655 $ 10,124 $ 11,959
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