A. Key Components of Results of Operations
Net revenues
Up until December 31, 2021, we generate revenue primarily through the sale of ECVs to our channel partners. Starting in 2022, especially after the acquisition of CAE and the termination of the channel partners in North America, we have started to transform our go-to-market model to a more blended approach. Historically (i.e. up until end of 2021), these revenues were generated solely by the sale of the Metro®. Starting from the last quarter of 2021, we began generating revenue from the sales of new ECV models, the Logistar™ 200, Logistar™ 210V, Logistar™ 100, Logistar™ 260, Teemak™, Neibor® 200, Avantier™ and Neibor® 150 in Europe, Clubcar, Logistar™ 210 and Logistar™ 260 in Asia, Avantier™ and Logistar™ 400 in the US. Starting from 2024, we expect substantial increase in revenue from the US market as we shift our focus to the North American market sales and introduce additional new models for the US market.
Net revenues ended September 30, 2024 and 2023 were generated from (a) vehicles sales, which primarily represent net revenues from sales of Metro® vehicles (including vehicle kits), Logistar™ 200, Logistar™ 210, Logistar™ 210V, Logistar™ 260, Logistar™ 400, Antric®, Avantier™, Logistar™ 100, Neibor® 150, Neibor® 200 and Clubcar, (b) sales of ECV spare-parts related to our Metro® vehicles, and (c) other sales, which primarily were: (i) the sales of inventory of outsourced ECV batteries and (ii) charges on services provided to channel partners for technical developments and assistance with vehicle homologation or certification.
Cost of goods sold
Cost of goods sold mainly consists of production-related costs including costs of raw materials, consumables, direct labor, overhead costs, depreciation of plants and equipment, manufacturing waste treatment processing fees and inventory write-downs. We incur cost of goods sold in relation to (i) vehicle sales and spare-part sales, including, among others, purchases of raw materials, labor costs, and manufacturing expenses that related to ECVs, and (ii) other sales, including cost and expenses that are not related to ECV sales.
Cost of goods sold also includes inventory write-downs. Inventories are stated at the lower of cost or net realizable value. The cost of raw materials is determined on the basis of weighted average. The cost of finished goods is determined on the basis of weighted average and is comprised of direct materials, direct labor cost and an appropriate proportion of overhead. Net realizable value is based on estimated selling prices less selling expenses and any further costs of completion. Adjustments to reduce the cost of inventory to net realizable value are made, if required, for estimated excess, obsolescence, or impaired balances. Write-downs are recorded in the cost of goods sold in our statements of operations and comprehensive loss.
Operating expenses
Our operating expenses consist of general and administrative, selling and marketing expenses, and research and development expenses. General and administrative expenses are the most significant components of our operating expenses. Operating expenses also include provision for doubtful accounts.
Research and Development Expenses
Research and development expenses consist primarily of employee compensation and related expenses, prototype expenses, costs associated with assets acquired for research and development, product development costs, production inspection and testing expenses, product strategic advisory fees, third-party engineering and contractor support costs and allocated overhead. We will continue committing our resource in our research and development functions as we continue to invest in new ECV models, new materials and techniques, vehicle management and control systems, digital control capabilities and other related technologies.
Selling and Marketing Expenses
Selling and marketing expenses consist primarily of employee compensation and related expenses, sales commissions, marketing programs, freight costs, travel and entertainment expenses and allocated overhead. Marketing programs consist of advertising, tradeshows, events, corporate communications and brand-building activities. We expect our selling and marketing expenses to increase as we introduce our new ECV models, further develop additional local dealership and service support networks to augment our expanding sales globally.
General and Administrative Expenses
General and administrative expenses consist primarily of employee compensation and related expenses for administrative functions including finance, legal, human resources, and fees for third-party professional services. While we continue to monitor general and administrative expenses, we anticipate that our general and administrative expenses will not increase in 2024 as we committed to improve operational efficiency in the next two years, following rapid expansions in previous years.
Accounts receivable and allowance for credit losses
The Company adopted ASC 326 Financial Instruments – Credit Losses using the modified retrospective approach through a cumulative-effect adjustment to accumulated deficit from January 1. 2023 and interim periods therein. Management used an expected credit loss model for the impairment of accounts receivable as of period ends. Management believes the aging of accounts receivable is a reasonable parameter to estimate expected credit loss, and determines expected credit losses for accounts receivables using an aging schedule as of period ends. The expected credit loss rates under each aging schedule were developed on basis of the average historical loss rates from previous years, and adjusted to reflect the effects of those differences in current conditions and forecasted changes. Management measured the expected credit losses of accounts receivable on a collective basis. When an accounts receivable does not share risk characteristics with other accounts receivables, management will evaluate such accounts receivable for expected credit loss on an individual basis. Doubtful accounts balances are written off and deducted from allowance. when receivables are deemed uncollectible. after all collection efforts have been exhausted and the potential for recovery is considered remote.
Impairment loss for long-lived assets
We evaluate the recoverability of long-lived assets or asset group with determinable useful lives whenever events or changes in circumstances indicate that an asset or a group of assets’ carrying amount may not be recoverable. We measure the carrying amount of long-lived asset against the estimated undiscounted future cash flows expected to result from the use of the assets or asset group and their eventual disposition. The carrying amount of the long-lived asset or asset group is not recoverable when the sum of the undiscounted expected future net cash flows is less than the carrying value of the asset being evaluated. Impairment loss is calculated as the amount by which the carrying value of the asset exceeds its fair value. Fair value is generally determined by discounting the cash flows expected to be generated by the assets or asset group, when the market prices are not readily available. The adjusted carrying amount of the assets become new cost basis and are depreciated over the assets’ remaining useful lives. Long-lived assets are grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities.
Other income (expenses)
Interest expense, net
Interest expense, net, consists of interest on outstanding loans and the convertible promissory notes.
Income(loss) from and impairment on equity method investments
Entities over which we have the ability to exercise significant influence but do not have a controlling interest through investment in common shares, or in-substance common shares, are accounted for using the equity method. Under the equity method, we initially record our investment at cost and subsequently recognize our proportionate share of each such entity’s net income or loss after the date of investment into the statements of operations and comprehensive loss and accordingly adjust the carrying amount of the investment. When our share of losses in the equity of such entity equals or exceeds our interest in the equity of such entity, we do not recognize further losses, unless we have incurred obligations or made payments or guarantees on behalf of such entity. An impairment charge is recorded when the carrying amount of the investment exceeds its fair value and this condition is determined to be other-than-temporary. The adjusted carrying amount of the assets become new cost basis.
Key Operating Metrics
We prepare and analyze operating and financial data to assess the performance of our business and allocate our resources. The following table sets forth our key performance indicators for the nine months ended September 30, 2024 and 2023.
| | | Nine Months ended September 30, | |
| | | | | | | |
| (Expressed in U.S. Dollars) | | (Unaudited) | |
| Gross margin of vehicle sales | | | 19.2 | % | | | 16.3 | % |
Gross margin of vehicle sales. Gross margin of vehicle sales is defined as gross profit of vehicle sales divided by total revenue of vehicle sales.
Results of Operations
The following table sets forth a summary of our statements of operations for the periods indicated:
| | | Three Months ended September 30, | | | Nine Months ended September 30, | |
| | | 2024 | | | 2023 | | | 2024 | | | 2023 | |
| (Expressed in U.S. Dollars) | | (Unaudited) | | | (Unaudited) | |
| Combined Statements of Operations Data: | | | | | | | | | | | | |
| Net revenues | | | 16,731,340 | | | | 5,762,831 | | | | 28,443,831 | | | | 13,470,895 | |
| Cost of goods sold | | | (12,688,393 | ) | | | (5,045,364 | ) | | | (23,161,743 | ) | | | (11,411,439 | ) |
| Gross profit/(loss) | | | 4,042,947 | | | | 717,467 | | | | 5,282,088 | | | | 2,059,456 | |
| Operating Expenses: | | | | | | | | | | | | | | | | |
| Selling and marketing expenses | | | (5,027,864 | ) | | | (2,626,829 | ) | | | (7,651,305 | ) | | | (7,238,563 | ) |
| General and administrative expenses | | | (7,934,755 | ) | | | (9,071,910 | ) | | | (21,945,891 | ) | | | (25,715,387 | ) |
| Research and development expenses | | | (1,476,684 | ) | | | (1,634,796 | ) | | | (4,292,153 | ) | | | (5,347,785 | ) |
| Total operating expenses | | | (14,439,303 | ) | | | (13,333,535 | ) | | | (33,889,349 | ) | | | (38,301,735 | ) |
| | | | | | | | | | | | | | | | | |
| Loss from operations | | | (10,396,356 | ) | | | (12,616,068 | ) | | | (28,607,261 | ) | | | (36,242,279 | ) |
| | | | | | | | | | | | | | | | | |
| Other Income (Expense): | | | | | | | | | | | | | | | | |
| Interest expense, net | | | (34,198 | ) | | | (84,573 | ) | | | (58,744 | ) | | | (137,726 | ) |
| Loss from equity method investments | | | (11,152 | ) | | | (107,069 | ) | | | (28,262 | ) | | | (236,672 | ) |
| Loss from acquisition of Antric Gmbh | | | - | | | | (1,316,772 | ) | | | - | | | | (1,316,772 | ) |
| Loss from acquisition of Hezhe | | | - | | | | - | | | | (149,872 | ) | | | - | |
| Impairment of Long-term investments | | | - | | | | (2,668 | ) | | | - | | | | (1,157,334 | ) |
| Gain on redemption of convertible promissory notes | | | - | | | | 966 | | | | - | | | | 865 | |
| Gain/(Loss) on exercise of warrants | | | 910 | | | | (1,134 | ) | | | 910 | | | | (228,749 | ) |
| Change in fair value of convertible promissory notes and derivative liability | | | (6,724 | ) | | | 15,143 | | | | 1,808 | | | | 88,568 | |
| Change in fair value of equity securities | | | 262,417 | | | | (1,879,593 | ) | | | 756,868 | | | | (1,166,125 | ) |
| Foreign currency exchange gain/(loss), net | | | 1,838,505 | | | | (311,204 | ) | | | 1,108,826 | | | | (1,667,475 | ) |
| Gain (loss) from cross-currency swaps | | | (705 | ) | | | - | | | | 882 | | | | - | |
| Other (expense) income, net | | | (646,718 | ) | | | 199,389 | | | | (477,909 | ) | | | 794,441 | |
| Loss before income taxes | | | (8,994,021 | ) | | | (16,103,583 | ) | | | (27,452,754 | ) | | | (41,269,258 | ) |
| Income tax benefit/(expense) | | | 12,434 | | | | 384 | | | | 47,149 | | | | (25,084 | ) |
| Net loss | | | (8,981,587 | ) | | | (16,103,199 | ) | | | (27,405,605 | ) | | | (41,294,342 | ) |
| Less: net loss attributable to non-controlling interests | | | (9,815 | ) | | | (534 | ) | | | (20,855 | ) | | | (159,244 | ) |
| Net loss attributable to shareholders of the Company | | | (8,971,772 | ) | | | (16,102,665 | ) | | | (27,384,750 | ) | | | (41,135,098 | ) |
Comparison of the Three and Nine Months ended September 30, 2024 and 2023
Net Revenues
The following table presents our net revenue components by amount and as a percentage of the total net revenues for the periods presented.
| | | Three Months ended September 30, | | | Nine Months ended September 30, | |
| | | 2024 | | | 2023 | | | 2024 | | | 2023 | |
| | | Amount | | | % | | | Amount | | | % | | | Amount | | | % | | | Amount | | | % | |
| (Expressed in U.S. Dollars) | | (Unaudited) | | | (Unaudited) | |
| Net revenues: | | | | | | | | | | | | | | | | | | | | | | | | |
| Vehicle Sales | | $ | 15,873,300 | | | | 94.9 | % | | $ | 5,506,589 | | | | 95.6 | % | | $ | 25,483,836 | | | | 89.6 | % | | $ | 12,732,639 | | | | 94.5 | % |
| Spare-part sales | | | 805,793 | | | | 4.8 | % | | | 241,930 | | | | 4.2 | % | | | 2,783,954 | | | | 9.8 | % | | | 586,632 | | | | 4.4 | % |
| Other sales | | | 52,247 | | | | 0.3 | % | | | 14,312 | | | | 0.2 | % | | | 176,041 | | | | 0.6 | % | | | 151,624 | | | | 1.1 | % |
| Total net revenues | | $ | 16,731,340 | | | | 100.0 | % | | $ | 5,762,831 | | | | 100.0 | % | | $ | 28,443,831 | | | | 100.0 | % | | $ | 13,470,895 | | | | 100.0 | % |
Net revenues for the nine months ended September 30, 2024 were approximately $28.4 million, an increase of approximately $15.0 million or 111.2% from approximately $13.5 million for the nine months ended September 30, 2023. The increase in net revenues in 2024 was primarily attributed to an increase in vehicle sales by approximately $12.8 million due to the improvement of sales volume and average selling price from approximately $19,234 to $23,125, and an increase in spare-part sales by approximately $2.2 million due to the increase of sales of iChassis. The net revenues in US market for the nine months ended September 30, 2024 were approximately $15.4 million, an increase of approximately $15.2 million from approximately $0.2 million for the nine months ended September 30, 2023. The increase in net revenues in US market in 2024 was primarily attributed to an increase in vehicle sales by approximately $15.3 million.
Net revenues for the three months ended September 30, 2024 were approximately $16.7 million, an increase of approximately $11.0 million or 190.3% from approximately $5.8 million for the three months ended September 30, 2023. The increase in net revenues in 2024 was primarily attributed to an increase in vehicle sales by approximately $10.4 million due to the increase of sales volume and average selling price from approximately $18,478 to $23,275, and the increase in spare-part sales by approximately $0.6 million. The net revenues in US market for the three months ended September 30, 2024 were approximately $10.3 million, an increase of approximately $10.1 million from approximately $0.2 million for the three months ended September 30, 2023. The increase in net revenues in US market in 2024 was primarily attributed to an increase in vehicle sales by approximately $10.1 million.
For the nine months ended September 30, 2024, we sold 1082 ECVs, including 117 fully assembled Metro® units, 62 fully assembled Logistar™ 200 units, 110 fully assembled Logistar™ 100 units, 23 fully assembled Teemak™ units, 68 fully assembled Logistar™ 260 units, 115 fully assembled Logistar™ 400 units, 445 fully assembled Avantier™ units, 20 Neibor® 150 units, 82 Clubcar units, 33 Antric® units, 3 Logistar™ 210 units, 1 Logistar™ 210V units and 3 Neibor® 200 units, compared with 662 ECVs for the nine months ended September 30, 2023, including 234 fully assembled Metro® units, 150 fully assembled Logistar™ 200, 157 fully assembled Logistar™ 100, 6 fully assembled Teemak™, 84 fully assembled Logistar™ 260, 1 fully assembled Logistar™ 400, 21 fully assembled Avantier™, 8 Neibor® 150 units and one Antric® V5. In U.S. market, we sold 149 ECVs, including 12 fully assembled Metro® units, 115 fully assembled Logistar™ 400 units, 18 fully assembled Teemak™ units and 4 fully assembled Avantier™ units, compared with 6 ECVs for the nine months ended September 30, 2023, including 5 fully assembled Metro® units and 1 fully assembled Logistar™ 400.
For the nine months ended September 30, 2024, we also sold 886 iChassis™ units and 20 other vehicles, other than the 1082 ECVs.
For the three months ended September 30, 2024, we sold 662 ECVs，, including 64 fully assembled Metro® units, 19 fully assembled Logistar™ 200, 51 fully assembled Logistar™ 100, 4 fully assembled Teemak™, 14 fully assembled Logistar™ 260, 78 fully assembled Logistar™ 400, 363 fully assembled Avantier™, 5 Neibor® 150 units, 43 Clubcar units, 19 Antric® units, 1 Logistar™ 210 units, and 1 Logistar™ 210V units, compared with 298 ECVs for the three months ended September 30, 2023, including 78 fully assembled Metro® units, 48 fully assembled Logistar™ 200, 108 fully assembled Logistar™ 100, 4 fully assembled Teemak™, 37 fully assembled Logistar™ 260, 1 fully assembled Logistar™ 400, 21 fully assembled Avantier™ and one Antric® V5.
For the three months ended September 30, 2024, we also sold 230 iChassis™ units and 20 other vehicles, other than the 662 ECVs.
Geographically, the vast majority of our net revenues were generated from vehicle sales in the U.S. during the nine months ended September 30, 2024. For the nine months ended September 30, 2024, net revenues from Europe, North America, Asia (including China) and Africa as a percentage of total revenues was 25.5%, 60.1%, 14.3% and 0.1%, respectively, compared to 74.5%, 3.4%, 22.1% and n il, respectively for the corresponding period in 2023.
The vast majority of our net revenues were generated from vehicle sales in the U.S. during the three months ended September 30, 2024. For the three months ended September 30, 2024, net revenues from Europe, North America, Asia (including China) and Africa as a percentage of total revenues was 21.6%, 67.6%, 10.6% and 0.2%, respectively, compared to 78.2%, 6.2%, 15.7% and nil, respectively for the corresponding period in 2023.
For the nine months ended September 30, 2024, net revenues from vehicle sales in Europe, North America, Asia (including China) and Africa as a percentage of total vehicle net revenues was 27.1%, 66.9%, 5.9% and 0.1%, respectively, compared to 77.6%, 3.3%, 19.1% and nil, respectively, for the corresponding period in 2023.
For the three months ended September 30, 2024, net revenues from vehicle sales in Europe, North America, Asia (including China) and Africa as a percentage of total vehicle net revenues was 22.2%, 71.2%, 6.5% and 0.1%, respectively, compared to 81.4%, 6.4%, 12.2% and nil, respectively, for the corresponding period in 2023.
Cost of goods sold
The following table presents our cost of goods sold by amount and as a percentage of the total cost of goods sold for the periods presented.
| | | Three Months ended September 30, | | | Nine Months ended September 30, | |
| | | 2024 | | | 2023 | | | 2024 | | | 2023 | |
| | | Amount | | | % | | | Amount | | | % | | | Amount | | | % | | | Amount | | | % | |
| (Expressed in U.S. Dollars) | | (Unaudited) | | | (Unaudited) | |
| Cost of goods sold: | | | | | | | | | | | | | | | | | | | | | | | | |
| Vehicle Sales | | $ | (8,195,192 | ) | | | 64.6 | % | | $ | (4,639,338 | ) | | | 92.0 | % | | $ | (14,913,358 | ) | | | 64.4 | % | | $ | (10,662,446 | ) | | | 93.4 | % |
| Spare-part sales | | | (483,249 | ) | | | 3.8 | % | | | (383,722 | ) | | | 7.6 | % | | | (2,376,339 | ) | | | 10.3 | % | | | (584,807 | ) | | | 5.1 | % |
| Other sales | | | (51,787 | ) | | | 0.4 | % | | | (22,304 | ) | | | 0.4 | % | | | (187,990 | ) | | | 0.8 | % | | | (164,186 | ) | | | 1.5 | % |
| Inventory write-down | | | (3,958,165 | ) | | | 31.2 | % | | | - | | | | - | | | | (5,684,056 | ) | | | 24.5 | % | | | - | | | | - | |
| Total cost of goods sold | | $ | (12,688,393 | ) | | | 100.0 | % | | $ | (5,045,364 | ) | | | 100.0 | % | | $ | (23,161,743 | ) | | | 100.0 | % | | $ | (11,411,439 | ) | | | 100.0 | % |
Cost of goods sold for the nine months ended September 30, 2024 was approximately $23.2 million, an increase of approximately $11.8 million or approximately 103.0% from approximately $11.4 million for the nine months ended September 30, 2023. The increase of cost of goods sold was mainly caused by (i) the increase in vehicle sales and spare-part sales of approximately $4.3 million and $1.8 million, respectively, (ii) the increase of inventory write-down of approximately $5.7 million compared to nil in the corresponding period in 2023.
Cost of goods sold for the three months ended September 30, 2024 was approximately $12.7 million, an increase of approximately $7.6 million or approximately 151.5% from approximately $5.0 million for the three months ended September 30, 2023. The increase of cost of goods sold was mainly caused by (i) the increase in vehicle sales of approximately $3.6 million, (ii) the increase of inventory write-down of approximately $4.0 million compared to nil in the corresponding period in 2023
Gross Profit/(Loss)
Gross Profit for the nine months ended September 30, 2024 was approximately $5.3 million, an increase of approximately $3.2 million from approximately $2.1 million of gross loss for the nine months ended September 30, 2023. For the nine months ended September 30, 2024 and 2023, our overall gross margin was approximately 18.6% and 15.3%, respectively. Our gross margin of vehicle sales for the nine months ended September 30, 2024 and 2023 was 19.2% and 16.3%, respectively. The increase of our overall gross profit was mainly caused by an increase in the gross profit of our vehicle sales and spare-part sales of approximately $8.5 million and $0.4 million, respectively, offset by the increase in the inventory write-down of approximately $5.7 million.
Gross Profit for the three months ended September 30, 2024 was approximately $4.0 million, an increase of approximately $3.3 million from approximately $0.7 million of gross profit for the three months ended September 30, 2023. For the three months ended September 30, 2024 and 2023, our overall gross margin was approximately 24.2% and 12.4%, respectively. Our gross margin of vehicle sales for the three months ended September 30, 2024 and 2023 was 23.5% and 15.7%, respectively. The increase of our overall gross profit was mainly caused by an increase in the gross profit of our vehicle sales and spare-part sales of approximately $6.8 million and $0.5 million, respectively, offset by the increase in the inventory write-down of approximately $4.0 million.
Selling and Marketing Expenses
Selling and marketing expenses for the nine months ended September 30, 2024 were approximately $7.7 million, an increase of approximately $0.4 million or approximately 5.7% from approximately $7.2 million for the nine months ended September 30, 2023. The increase in selling and marketing expenses in 2024 was primarily attributed to the increase in marketing expenses and marketing related professional fee of approximately $1.7 million and $0.7 million, respectively, offset by the decrease in salary expense, freight and share-based compensations of approximately $1.0 million, $0.6 million and $0.4 million, respectively.
Selling and marketing expenses for the three months ended September 30, 2024 were approximately $5.0 million, an increase of approximately $2.4 million or approximately 91.4% from approximately $2.6 million for the three months ended September 30, 2023. The increase in selling and marketing expenses in 2024 was primarily attributed to the increase in marketing expenses and marketing related professional fee of approximately $2.3million and $0.3 million, respectively, offset by the decrease in freight of approximately $0.2 million.
General and Administrative Expenses
General and administrative expenses for the nine months ended September 30, 2024 were approximately $21.9 million, a decrease of approximately $3.8 million or approximately 14.7% from approximately $25.7 million for the nine months ended September 30, 2023. The decrease in general and administrative expenses in 2024 was primarily attributed to a decrease in in legal and professional fee, office expenses and share-based compensations of approximately $2.1 million, $1.7 million and $1.5 million, respectively, offset by the increase in salary and social insurance expense, lease ROU amortization, amortization, leasehold improvement depreciation and others of approximately $0.7 million, $0.3 million, $0.2 million, $0.3 million and $0.1 million, respectively.
General and administrative expenses for the three months ended September 30, 2024 were approximately $7.9 million, a decrease of approximately $1.1 million or approximately 12.5% from approximately $9.1 million for the three months ended September 30, 2023. The decrease in general and administrative expenses in 2024 was primarily attributed to a decrease in share-based compensation, legal and professional fee and salary, lease ROU amortization and social insurance $1.1 million, $0.6 million, $0.1 million and $0.2 million, respectively, offset by the increase in leasehold improvement depreciation, rental expense and others of approximately $0.3 million, $0.2 million and $0.4 million, respectively, the increase in others was mainly caused by the increase in fee related to garage liability insurance.
Research and Development Expenses
Research and development expenses for the nine months ended September 30, 2024 were approximately $4.3 million, a decrease of approximately $1.1 million or approximately 19.7% from approximately $5.3 million for the nine months ended September 30, 2023. The decrease in research and development expenses in 2024 was primarily attributed to the decrease in design and testing material expenditures of approximately $1.3 million, offset by the increase in salary expense of approximately $0.4 million.
Research and development expenses for the three months ended September 30, 2024 were approximately $1.5 million, a decrease of approximately $0.2 million or approximately 9.7% from approximately $1.6 million for the three months ended September 30, 2023. The decrease in research and development expenses in 2024 was primarily attributed to the decrease in design and development expenditures, share-based compensations and others of approximately $0.06 million, $0.09 million and $0.06 million, respectively.
Interest income (expense), net
Interest expense, net, mainly consists of interest on convertible bonds. Net interest expense was approximately $0.06 million for the nine months ended September 30, 2023, a decrease of approximately $0.08 million or approximately 57.4% compared to the approximately $0.1 million in interest expense for the nine months ended September 30, 2023. The increase was primarily attributable to (i) the decrease in interest income from deposit of approximately $0.2 million, (ii) the increase in interest income from Acton convertible bonds, RAP and HWE of approximately $0.02 million, $0.01 million and $0.02 million respectively, (iii) a decrease in interest expense to convertible bonds of approximately $0.2 million.
Interest expense, net, mainly consists of interest on convertible bonds. Net interest expense was approximately $ 0.03 million for the three months ended September 30, 2023, a decrease of approximately $0.05 million or approximately 59.6% compared to the approximately $0.08 million in interest expense for the three months ended September 30, 2023. The decrease was primarily attributable to (i) an increase in interest income from deposit and HWE of approximately $0.2 million and $0.1 million, (ii) a decrease in interest income from short-term investment of approximately $0.2 million, (iii) the increase in interest expense to convertible bonds of approximately $0.05 million.
Other income (expense), net
Other expense, net for the nine months ended September 30, 2024 was approximately $0.5 million, representing a change of approximately $1.3 million compared to approximately $0.8 million of other income, net for the nine months ended September 30, 2023. The change of other income/(expense) in 2024 compared to 2023 was primarily attributable to the increase in loss on investment and income on disposal of PPE of approximately $1.0 million and $0.3 million, respectively.
Other expense, net for the three months ended September 30, 2024 was approximately $0.6 million, representing a change of approximately $0.8 million compared to approximately $0.2 million of other income, net for the three months ended September 30, 2023. The change of other income/(expense) in 2024 compared to 2023 was primarily attributable to the increase in loss on investment of approximately $0.7 million and the decrease in gain on others of approximately $0.1 million.
Change in fair value of convertible promissory notes and derivative liability
A gain in the change in fair value of convertible promissory notes and derivative liability for the nine months ended September 30, 2024 was approximately $0 million, representing a decrease of approximately $0.09 million compared to approximately $0.09 million for the nine months ended September 30, 2023.
A loss in the change in fair value of convertible promissory notes and derivative liability for the three months ended September 30, 2024 was approximately $0 million, representing a change of approximately $0.02 million compared to a gain in the change in fair value of convertible promissory notes and derivative liability of approximately $0.02 million for the three months ended September 30, 2023.
Change in fair value of equity securities
A gain in the change in fair value of equity securities for the nine months ended September 30, 2024 was approximately $0.8 million compared to approximately $1.2 million of a loss in the change in fair value of equity securities for the nine months ended September 30, 2023.
A gain in the change in fair value of equity securities for the three months ended September 30, 2024 was approximately $0.3 million compared to approximately $1.9 million of a loss in the change in fair value of equity securities for the three months ended September 30, 2023.
Loss from acquisition of Antric
A loss from acquisition of Antric for the nine months ended September 30, 2024 was nil compared to $1.3 million of loss from acquisition of Antric for the nine months ended September 30, 2023.
A loss from acquisition of Antric for the three months ended September 30, 2024 was nil compared to $1.3 million of loss from acquisition of Antric for the three months ended September 30, 2023.
Impairment of Long-term investments
Impairment of Long-term investments for the nine months ended September 30, 2024 was nil compared $1.2 million of impairment of Antric for the nine months ended September 30, 2023.
Impairment of Long-term investments for the three months ended September 30, 2024 was nil compared $0 million of impairment of Antric for the three months ended September 30, 2023.
Non-GAAP Financial Measures
Adjusted EBITDA for the three and nine months ended September 30, 2024 and 2023
In addition to our results determined in accordance with GAAP, we believe Adjusted EBITDA, a non-GAAP measure is useful in evaluating operational performance. We use Adjusted EBITDA to evaluate ongoing operations and for internal planning and forecasting purposes. We believe that non-GAAP financial information, when taken collectively, may be helpful to investors in assessing operating performance.
Adjusted EBITDA is a supplemental measure of our performance that is not required by, or presented in accordance with, GAAP. Adjusted EBITDA is not a measurement of our financial performance under GAAP and should not be considered as an alternative to net income or any other performance measure derived in accordance with GAAP. We define Adjusted EBITDA as net income (or net loss) before net interest expense, income tax expense, depreciation and amortization as further adjusted to exclude the impact of stock-based compensation expense and other non-recurring expenses including expenses related to TME Acquisition, expenses related to one-off payment inherited from the original Naked Brand Group, impairment of goodwill, convertible bond issuance fee, loss on redemption of convertible promissory notes, loss on exercise of warrants, and change in fair value of convertible promissory notes and derivative liability.
We present Adjusted EBITDA because we consider it to be an important supplemental measure of our performance and believe it is frequently used by securities analysts, investors, and other interested parties in the evaluation of companies in our industry. Management believes that investors’ understanding of our performance is enhanced by including this non-GAAP financial measure as a reasonable basis for comparing our ongoing results of operations. Management uses Adjusted EBITDA:
| • | as a measurement of operating performance because it assists us in comparing the operating performance of our business on a consistent basis, as it removes the impact of items not directly resulting from our core operations; |
| • | for planning purposes, including the preparation of our internal annual operating budget and financial projections; |
| • | to evaluate the performance and effectiveness of our operational strategies; and |
| • | to evaluate our capacity to expand our business. |
By providing this non-GAAP financial measure, together with the reconciliation, we believe we are enhancing investors’ understanding of our business and our results of operations, as well as assisting investors in evaluating how well we are executing our strategic initiatives. We caution investors that amounts presented in accordance with our definition of Adjusted EBITDA may not be comparable to similar measures disclosed by our competitors because not all companies and analysts calculate Adjusted EBITDA in the same manner. Adjusted EBITDA has limitations as an analytical tool, and should not be considered in isolation, or as an alternative to, or a substitute for net income or other financial statement data presented in our financial statements as indicators of financial performance. Some of the limitations are:
| • | such measures do not reflect our cash expenditures; |
| • | such measures do not reflect changes in, or cash requirements for, our working capital needs; |
| • | although depreciation and amortization are recurring, non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future and such measures do not reflect any cash requirements for such replacements; and |
| • | the exclusion of stock-based compensation expense, which has been a significant recurring expense and will continue to constitute a significant recurring expense for the foreseeable future, as equity awards are expected to continue to be an important component of our compensation strategy. |
Due to these limitations, Adjusted EBITDA should not be considered as a measure of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our GAAP results and using these non-GAAP measures only supplementally. As noted in the table below, Adjusted EBITDA includes adjustments to exclude the impact of stock-based compensation expense and material infrequent items. It is reasonable to expect that these items will occur in future periods. However, we believe these adjustments are appropriate because the amounts recognized can vary significantly from period to period, do not directly relate to the ongoing operations of our business and may complicate comparisons of our internal operating results and operating results of other companies over time. In addition, Adjusted EBITDA may include adjustments for other items that we do not expect to regularly occur in future reporting periods. Each of the normal recurring adjustments and other adjustments described in this paragraph and in the reconciliation table below help management with a measure of our core operating performance over time by removing items that are not related to day-to-day operations.
The following table reconciles Adjusted EBITDA to the most directly comparable GAAP financial performance measure, which is net loss:
| | | Three Months ended September 30, | | | Nine Months ended September 30, | |
| | | 2024 | | | 2023 | | | 2024 | | | 2023 | |
| (Expressed in U.S. Dollars) | | (Unaudited) | | | (Unaudited) | |
| Net loss | | $ | (8,981,587 | ) | | $ | (16,103,199 | ) | | $ | (27,405,605 | ) | | $ | (41,294,342 | ) |
| Interest expense, net | | | 34,198 | | | | 84,573 | | | | 58,744 | | | | 137,726 | |
Income tax expense/(benefit) | | | (12,434 | ) | | | (384 | ) | | | (47,149 | ) | | | 25,084 | |
| Depreciation and amortization | | | 630,270 | | | | 425,217 | | | | 1,605,514 | | | | 1,213,489 | |
| Share-based compensation expense | | | 870,094 | | | | 2,154,710 | | | | 2,643,214 | | | | 4,565,000 | |
| Gain on redemption of convertible promissory notes | | | - | | | | (966 | ) | | | - | | | | (865 | ) |
| Loss/(gain) on exercise of warrants | | | (910 | ) | | | 1,134 | | | | (910 | ) | | | 228,749 | |
| Change in fair value of convertible promissory notes and derivative liability | | | 6,724 | | | | (15,143 | ) | | | (1,808 | ) | | | (88,568 | ) |
| Loss from acquisition of Antric | | | - | | | | 1,316,772 | | | | - | | | | 1,316,772 | |
| Adjusted EBITDA | | $ | (7,453,645 | ) | | $ | (12,137,286 | ) | | $ | (23,148,000 | ) | | $ | (33,896,955 | ) |
B. Liquidity and Capital Resources
We have historically funded working capital and other capital requirements primarily through bank loans, equity financings and short-term loans. Also, the reverse recapitalization we have completed at the end of December 2021 provided significant funding for the Company’s operations. Cash is required primarily to purchase raw materials, repay debts and pay salaries, office expenses and other operating expenses.
As of September 30, 2024, we had approximately $21.8 million in cash and cash equivalents, approximately $4.6 million of accounts receivable. and approximately $35.9 million of inventory as compared to approximately $44.6 million in cash and cash equivalents, $4.6 million in accounts receivable, and $43.1 million in inventory as of September 30, 2023. For the nine months ended September 30, 2024 and 2023, net cash used in operating activities was approximately $12.9 million and $45.6 million, respectively.
Short-Term Liquidity Requirements
We are looking at measures to generate operating efficiency as well as increasing the inventory turns in containing the growth of working capital for reducing negative net cash used in operating activities. With the cash improvement initiatives, we believe our cash and cash equivalents will be sufficient for us to continue to execute our business strategy over the twelve months period following the date of issuance of this 10Q. Our current business strategy for the next twelve months includes (i) the continued rollout of our new ECV models in North America and Europe, as applicable, (ii) the establishment of local assembly facilities in the United States and (iii) additional plants and equipment for the expansion of our Changxing factory1. Actual results could vary materially as a result of a number of factors, including:
| • | The costs of bringing our new facilities into operation; |
| • | The timing and costs involved in rolling out new ECV models to market; |
| • | Our ability to manage the costs of manufacturing our ECVs; |
| • | The costs of maintaining, expanding and protecting our intellectual property portfolio, including potential litigation costs and liabilities; |
| • | Revenues received from sales of our ECVs; |
| • | The costs of additional general and administrative personnel, including accounting and finance, legal and human resources, as well as costs related to litigation, investigations, or settlements; |
| • | Our ability to collect future revenues; and |
| • | Other risks discussed in the section titled “Risk Factors.” |
For the twelve months from the date hereof, we also plan to continue implementing measures to increase revenues and control operating costs and expenses, implementing comprehensive budget controls and operational assessments, implementing enhanced vendor review and selection processes as well as enhancing internal controls.
1 NTD: Company to provide any additional business plans requiring material capital over the next twelve months.
Long-Term Liquidity Requirements
In the long-term, we plan to regionalize the manufacturing and supply chain relating to certain components of our ECVs in the geographic markets in which our ECVs are sold. In the long-term, through our supply chain development know-how, we intend to establish supply chain relationships in North America and the European Union to support anticipated manufacturing and assembly needs in these markets, thereby reducing the time in transit and potentially other landed costs elements associated with importing our components and spare parts from China. Currently, the majority of our revenues is derived from the sale of ECVs by private label channel partners that assemble our vehicle kits in their own facilities. As part of our growth strategy, we plan to expand our channel partner network, and local assembly facilities to regionalize our manufacturing and supply chains to better serve our global customers especially to expand our after-sales-market services offerings.
We intend to further expand our technology through continued investment in research and development. Since inception in 2013 through September 30, 2024, we have spent over approximately $94.3 million in research and development activities related to our operations. We plan to increase our research and development expenditure over the long term as we build on our technologies in vehicle development, driving control, cloud-based platforms, and innovations for promoting sustainable energy.
For our long-term business plan, we plan to fund current and future planned operations mainly through cash on hand, cash flow from operations, lines of credit and additional equity and debt financings to the extent available on commercially favorable terms.
Working Capital
As of September 30, 2024, our working capital was approximately $53.3 million, as compared to a working capital of approximately $75.6 million as of December 31, 2023. The approximately $22.3 million decrease in working capital during 2024 was primarily due to the decrease of cash and cash equivalents of approximately $7.6 million, the decrease of short-term investment of approximately $4.2 million, the decrease of accounts receivable of approximately $2.0 million, the decrease of inventories of $8.0 million, the increase of contractual liabilities of approximately $1.6 million, offset by the decrease of accounts payable of approximately $0.6 million.
Cash Flow
| | | Nine Months ended September 30, | |
| | | 2024 | | | 2023 | |
| (Expressed in U.S. Dollars) | | (Unaudited) | |
| Net cash used in operating activities | | $ | (12,912,011 | ) | | $ | (45,588,906 | ) |
| Net cash (used in) provided by investing activities | | | 4,858,042 | | | | (12,913,713 | ) |
| Net cash (used in) provided by financing activities | | | 1,243,068 | | | | (48,136,596 | ) |
| Effect of exchange rate changes on cash | | | 70,752 | | | | (2,614,204 | ) |
| Net (decrease) increase in cash, cash equivalents, and restricted cash | | | (6,740,149 | ) | | | (109,253,419 | ) |
| Cash and cash equivalents, and restricted cash at beginning of the year | | | 29,571,897 | | | | 154,096,801 | |
| Cash and cash equivalents, and restricted cash at end of the period | | $ | 22,831,748 | | | $ | 44,843,382 | |
Operating Activities
Our net cash used in operating activities was approximately $12.9 million and $45.6 million for the nine months ended September 30, 2024 and 2023, respectively.
Net cash used in operating activities for the nine months ended September 30, 2024 was primarily attributable to (i) our net loss of approximately $27.4 million and adjusted for non-cash items of approximately $12.1 million, which primarily consisted of impairment of slow-moving inventories, share based compensation expense and amortization of operating lease right-of-use asset of approximately $5.7 million, $2.6 million and $3.6 million, respectively, (ii) the decrease in inventories, accounts receivable and deferred revenue of approximately $3.5 million, $2.0 million and $1.2 million, respectively, (iii) the increase in operating lease liabilities of approximately $2.7 million.
Investing Activities
Net cash provided by investing activities was approximately $4.9 million for the nine months ended September 30, 2024. Net cash provided by investing activities for the nine months ended September 30, 2024 was primarily attributable to cash received from redeeming regular financial investments of approximately $8.4 million, redemption of equity securities investment of approximately $1.6 million, approximately $4.2 million in paid for regular financial investments, approximately $0.7 million in purchase of property, plant and equipment and approximately $0.4 million net cash paid in acquisition of 80% of Hezhe's share and including related expenses.
Financing Activities
Net cash provided by financing activities was approximately $1.2 million for the nine months ended September 30, 2024. Net cash provided by financing activities for the nine months ended September 30, 2024 was primarily attributable to approximately $0.7 million due to proceeds from bank loans and $0.7 million due to loans proceed from third parties, offset by repayments of bank loans of approximately $0.1 million.
Contractual Obligations
In February 2021, we signed a non-cancellable operating lease agreement for warehouse and trial production use in Freehold, New Jersey (Willowbrook Road) of approximately 9,750 square feet. The lease period began in February 2021 and ends in January 2025. The annual base rent for this facility is $175,500 starting from February 2023. The lease rent fee will be adjusted upward by 3% annually afterwards. We signed the first addendum to lease on December 7, 2022 and the renewal period is two years commencing on Feb. 1, 2023 and terminating on Jan. 31, 2025, the annual base rent for the first twelve months the period is $17,500 and the annual base rent for the second twelve months the period is $180,765. The lease terminated on May 31, 2024.
In June 2021, we signed two non-cancellable operating lease agreements for approximately 11,700 square feet and 3,767 square feet, respectively, of two floors of an office building in Hangzhou, China. The lease period for each lease agreement began in June 2021 and ends in May 2025. Pursuant to each agreement, we paid the first six months of our rent obligations in June 2021 and thereafter will be obligated to make rental payments in advance semi-annually. The total annual base rent under these two lease agreements is $170,617 for the term ending May 2022 and $186,866 for the term ending May 2023.
On December 4, 2021, we entered into an entrustment agreement with Cedar Europe GmbH, a company organized under the laws of Germany (“Cedar”) pursuant to which we entrusted Cedar to, in Cedar’s name, obtain a lease agreement for facilities in Germany and operate such lease facility under Cedar’s name in exchange for the Cenntro’s responsibility for all expenditures and costs of the lease. On December 24, 2021, Cedar entered into a lease agreement for an approximately 27,220 square feet facility in Dusseldorf, Germany, where we now house our European Operations Facility. The lease period began on January 1, 2022 and ends on December 31, 2024. Pursuant to such lease agreement, the total annual base rent is€354,787 (or approximately $385,651) for the lease term. On 17 January 2023, Cedar transferred the lease to CEGE, effectively from 1 February, 2023.
On January 20, 2022, we entered into an operating lease agreement (the “Jacksonville Lease”), between CAC, as tenant, the Company, as guarantor, and JAX Industrial One, LTD., a Florida limited liability company, as landlord, for a facility of approximately 100,000 square feet in Jacksonville, Florida. The lease period commenced on January 20, 2022 and ends 120 months following a five-month rent abatement period. Pursuant to the Jacksonville Lease, minimum annual rent is approximately $695,000, $722,800, and $751,710, for the first three years, sequentially, and rising thereafter.
On March 22, 2023, we signed a non-cancellable operating lease agreement for approximately 26,579 square feet as a local plant in Colombia, the lease period began on May 1, 2023 and the lease term is two years. The rent is COP 46,796,001.49 (or approximately $11,778.71) per month and the value of the lease fee shall be readjusted in a proportion equal to the consumer price index (CPl) certified by DANE as of December 31 of the immediately preceding year, plus two (2) points.
On May 19, 2023, we completed the acquisition with Cenntro Elecautomotiv, S.L., our EVC in Spain. On April 3, 2023, Cenntro Elecautomotiv, S.L. signed a non-cancellable operating lease agreement for approximately 1,765 square feet as a local office in Barcelona, Spain, the lease period began on April 3, 2023 and the lease term is five years. The monthly rent is €1,776 (or approximately $1,931.60) plus value-added tax with a two-month rent abatement period. In addition, Cenntro Elecautomotiv, S.L. signed a non-cancellable operating lease agreement for approximately 3,471 square feet as a service center in Barcelona, Spain on August 9, 2022, the lease period began on August 1, 2022 and the lease term is ten years. The annual rent is €36,000 (or approximately $39,132) and shall be readjusted depending on the changes of the consumer price index (CPl) determined by the National Bureau of Statistics and its substitute institutions. Legal defense is €6,000 (or approximately $6,486). The lease of local office terminated on April 10, 2024.
On April 4, 2023, we signed a non-cancellable operating lease agreement for approximately 2,500 square feet in Freehold, New Jersey. The lease period commenced on July 17, 2023 and ends on July 31, 2025. The annual base rent for the first twelve months of the period is $33,525 and the annual base rent for the second twelve months of the period is $35,201. The lease terminated on June 30, 2024.
On February 16, 2022, we signed a non-cancellable operating lease agreement for apartment 53D in the building at 555 Tenth Avenue, New York, NY 10018. The term is one year and one month, beginning on March 5, 2022 and ending on April 4, 2023. The monthly rent is $5,750. On February 1, 2023, we signed a renewal lease agreement. The term of this lease is one year, beginning on April 5, 2023 and ending on April 4, 2024. The lease was not renewed. The monthly rent is $5,950.
On March 25, 2022, we completed the acquisition of TME, and change its name to Cenntro Automotive Europe GmbH ("CAE”). TME signed a non-cancellable operating lease agreement for approximately 5,212 square meters in 2019, the lease period starts on July 1, 2019 and ends on June 30, 2024, the monthly rent is €18,891 (or approximately $20,534.52).
On December 29, 2022, we signed a non-cancellable operating lease agreement with BAL Freeway Associates, LLC for approximately 64,000 square feet as a facility in Ontario, California. The lease period commenced on April 1, 2023 and ends five years following a one-month rent abatement period. The base rent for the first year is $115,200 per month. The monthly rent for the following four years is $119,808, $124,600.32, $129,584.33 and $134,767.71, respectively.
On December 15, 2022, we signed a non-cancellable operating lease agreement for approximately 41,160 square feet as a facility in Howell, New Jersey. The lease period began on February 1, 2023 and ends five years, the first annual base rent is $493,920 and the annual increase is 3%.
On August 4, 2022, we signed a non-cancellable operating lease agreement in Mexico as a facility. For the first 12 months, the rentable area is 58,413 square feet. Starting on the month 13 to month 18, the rentable area is 85,554 square feet, and as of month 19 of the Rent Commencement Date and for the remainder of the initial term, the rentable area is 112,694 square feet. The lease period commenced on January, 2023 and ends 8.5 years. The monthly rent is $29,225.38 and the annual increase is the higher of a) the consumer price index, or b) 2.5%.
On December 8, 2022, we signed a non-cancellable operating lease agreement for approximately 10,656 square feet as a headquarters and service center in Dominica Republic. The lease period commenced on February 15, 2023 and ends five years. The rent is $9,000 per month and the annual increase is 5%.
On July 28, 2022, we signed a non-cancellable operating lease agreement for approximately 12,000 square feet as an EV center in Jacksonville, Florida. The lease period began on September 1, 2022 and ends on August 31, 2029, the first annual base rent is $150,000 and the annual increase is 4%. The lease terminated on September 2024.
On August 31, 2023, we completed the acquisition with Antric GmbH in Germany. On July 20, 2022, Antric signed a non-cancellable operating lease agreement for approximately 4,361 square feet in Bochum, Germany, the lease period ends on December 31, 2026. The monthly rent is €3,605.26 (or approximately $3,918.92). On September 1, 2022, the lease area increased to 7,326 square feet and the monthly rent increased to €6,000.32 (or approximately $6,522.35). The additional deposit is €18,000.96 (or approximately $19,567.04). On January 20, 2023, Antric signed another non-cancellable operating lease agreement for approximately 252 square feet in Bochum, Germany, the lease period starts on February 1, 2023 and ends on December 31, 2026. The monthly rent increased to €6,315.38 (or approximately $6,864.82). On March 27, 2023, Antric signed another non-cancellable operating lease agreement for approximately 2,949 square feet in Bochum, Germany, the lease period starts on April 1, 2023 and ends on December 31, 2026. The monthly rent increased to €8,597.80 (or approximately $9,345.81).
We have not entered into any off-balance sheet financial guarantees or other off-balance sheet commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as shareholders’ equity or that are not reflected in our Unaudited Financial Statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or product development services with us.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with U.S. GAAP requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated and combined financial statements, the reported amounts of revenue and expenses during the reporting period and the related disclosures in the consolidated and combined financial statements and accompanying footnotes. Out of our significant accounting policies, which are described in “Note 2—Summary of Significant Accounting Policies” of our consolidated and combined financial statements for the nine months ended September 30, 2024, included elsewhere in this Semi-annual Report, certain accounting policies are deemed “critical,” as they require management’s highest degree of judgment, estimates and assumptions. While management believes its judgments, estimates and assumptions are reasonable, they are based on information presently available and actual results may differ significantly from those estimates under different assumptions and conditions.
Basis of presentation
The accompanying consolidated balance sheet as of December 31, 2023, which has been derived from audited financial statements, and the unaudited condensed consolidated financial statements as of September 30, 2024 and for the nine months ended September 30, 2024 and 2023 have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”).
Certain information and disclosures, which are normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), have been condensed or omitted pursuant to such rules and regulations. Management believes that the disclosures made are adequate to provide a fair presentation. The interim financial information should be read in conjunction with the financial statements and the notes for the fiscal year ended December 31, 2023. The results of operations for the nine months ended September 30, 2024 are not necessarily indicative of the results for the full year or any future periods.
The preparation of the unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires the Company to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant accounting estimates reflected in the Company’s unaudited condensed consolidated financial statements include allowance for credit losses, lower of cost and net realizable value of inventories, impairment losses for long-lived assets and investments, valuation allowance for deferred tax assets and fair value of convertible promissory notes and warrants. Changes in facts and circumstances may result in revised estimates. The current economic environment has increased the degree of uncertainty inherent in those estimates and assumptions.
Fair value measurement
ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. The hierarchy prioritizes the inputs into three levels based on the extent to which inputs used in measuring fair value are observable in the market. These tiers include:
Level 1—defined as observable inputs such as quoted prices in active markets;
Level 2—defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and
Level 3—defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions.
The Company’s financial instruments not reported at fair value primarily consist of cash and cash equivalents, restricted cash, accounts receivable, prepayments and other current assets, amount due from and due to related parties, accounts payable and accrued expenses and other current liabilities.
The carrying value of cash and cash equivalents, restricted cash, accounts receivable and other current assets, accounts payable, accrued expenses and other current liabilities and amount due from and due to related party, current were approximate fair value because of the short-term nature of these items. The estimated fair values of loan from third party, and amount due from related party, non-current were not materially different from their carrying value as presented due to the brief maturities and because the interest rates on these borrowings approximate those that would have been available for loans of similar remaining maturities and risk profiles.
Available-for-sale investments and currency-cross swap were classified within Level 1 of the fair value hierarchy because they were valued using quoted prices in active markets. Our debt security investments are classified within Level 3 of the fair value hierarchy. As the Issuer is not yet listed and there are no similar companies in the market at the same stage of development for comparison, the Issuer is difficult to value, and the valuation is not considered reliable. Therefore, the Company develop own assumption by future cash flow forecast, which contains principle paid and interests accrued.
The fair value option provides an election that allows a company to irrevocably elect to record certain financial assets and liabilities at fair value on an instrument-by-instrument basis at initial recognition. The Company has elected to apply the fair value option to: i) convertible promissory notes payable due to the complexity of the various conversion and settlement options available to notes holders; ii) convertible loan receivable, which was recognized as debt security in long-term investments, and iii) currency-cross swap, which was recognized as derivative financial instruments in short-term investments.
The convertible promissory notes payable accounted for under the fair value option election are each a debt host financial instrument containing embedded features that would otherwise be required to be bifurcated from the debt-host and recognized as separate derivative liabilities subject to initial and subsequent periodic estimated fair value measurements in accordance with GAAP. Notwithstanding, when the fair value option election is applied to financial liabilities, bifurcation of an embedded derivative is not required, and the financial liability is initially measured at its issue-date estimated fair value and then subsequently remeasured at estimated fair value on a recurring basis as of each reporting period date.
The portion of the change in fair value attributed to a change in the instrument-specific credit risk is recognized as a component of other comprehensive income and the remaining amount of the fair value adjustment is recognized as changes in fair value of convertible promissory notes and derivative liabilities in the Company’s consolidated statement of operations. The estimated fair value adjustment is presented in a respective single line item within other expense in the consolidated statement of operations because the change in fair value of the convertible notes was not attributable to instrument-specific credit risk.
In connection with the issuances of convertible promissory notes, the Company issued investor warrants and placement agent warrants to purchase common stock of the Company. The Company utilizes a Binomial model to estimate the fair value of the warrants and are considered a Level 3 fair value measurement. The warrants are measured at each reporting period, with changes in fair value recognized in the statement of operations.
As a practical expedient, the Company uses Net Asset Value (“NAV”) or its equivalent to measure the fair value of its certain fund investment. The Company’s investments valued at NAV as a practical expedient are: i) private equity funds, which represent the investment in equity securities on the condensed consolidated balance sheet; ii) wealth management products purchased from banks, which represents the available-for-sale investments in short-term investments on the condensed consolidated balance sheet.
Revenue recognition
The Company recognizes revenue when goods or services are transferred to customers in an amount that reflects the consideration which it expects to receive in exchange for those goods or services. In determining when and how revenue is recognized from contracts with customers, the Company performs the following five-step analysis: (i) identification of a contract with the customer; (ii) determination of performance obligations; (iii) measurement of the transaction price; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation.
The Company generates revenue primarily through sales of light-duty ECVs, sales of ECV parts, and sales of off-road electric vehicles. Revenue is recognized at a point in time once the Company has determined that the customer has obtained control over the product. Revenue is recognized net of return allowance and any taxes collected from customers, which are subsequently remitted to governmental authorities. Significant judgement is required to estimate return allowances. The Company reasonably estimate the possibility of return based on the historical experience, changes in judgments on these assumptions and estimates could materially impact the amount of net revenues recognized.
Shipping and handling costs for product shipments occur prior to the customer obtaining control of the goods are accounted for as fulfilment costs rather than separate performance obligations and recorded as sales and marketing expenses.
The following table disaggregates the Company’s revenues by product line for the nine months ended September 30, 2024 and 2023:
| | | For the Nine Months ended September 30, | |
| | | 2024 | | | 2023 | |
| | | (Unaudited) | | | (Unaudited) | |
| Vehicles sales | | $ | 25,483,836 | | | $ | 12,732,639 | |
| Spare-parts sales | | | 2,783,954 | | | | 586,632 | |
| Other service income | | | 176,041 | | | | 151,624 | |
| Net revenues | | $ | 28,443,831 | | | $ | 13,470,895 | |
The Company’s revenues are derived from Europe, Asia and America. The following table sets forth disaggregation of revenue by customer location.
| | | For the Nine Months ended
September 30, | |
| | | 2024 | | | 2023 | |
| | | (Unaudited) | | | (Unaudited) | |
Primary geographical markets | | | | |
| Europe | | $ | 17,071,721 | | | $ | 451,848 | |
| Asia | | | 7,260,544 | | | | 10,035,492 | |
| America | | | 4,080,473 | | | | 2,983,555 | |
| Others | | | 31,093 | | | | - | |
| Total | | $ | 28,443,831 | | | $ | 13,470,895 | |
Contract Balances
Timing of revenue recognition was once the Company has determined that the customer has obtained control over the product. Accounts receivable represent revenue recognized for the amounts invoiced and/or prior to invoicing when the Company has satisfied its performance obligation and has an unconditional right to the payment.
Contractual liabilities primarily represent the Company’s obligation to transfer additional goods or services to a customer for which the Company has received consideration. The consideration received remains a contractual liability until goods or services have been provided to the customer. For the nine months ended September 30, 2024 and 2023, the Company recognized $946,071 and $484,477 revenue that was included in contractual liabilities as of December 31, 2023 and 2022, respectively.
The following table provides information about receivables and contractual liabilities from contracts with customers:
| | | September 30, 2024 | | | December 31, 2023 | |
| | | (Unaudited) | | | (Unaudited) | |
| Accounts receivable, net | | $ | 4,556,857 | | | $ | 6,530,801 | |
| Contractual liabilities | | $ | 4,958,315 | | | $ | 3,394,044 | |
Recently issued accounting standards pronouncement
Except for the ASUs (“Accounting Standards Updates”) issued but not yet adopted disclosed in “Note 2 (ab) Recently issued accounting standards pronouncements” of the Company 2023 Form 10-K, there is no ASU issued by the FASB that is expected to have a material impact on the Company’s unaudited condensed consolidated results of operations or financial position.
