SPI ENERGY CO., LTD. Management report and analysis of the financial situation and operating results. (Form 10-Q)
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and the related notes included elsewhere in this interim report. Our consolidated financial statements have been prepared in accordance with
U.S.GAAP. The following discussion and analysis contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including, without limitation, statements regarding our expectations, beliefs, intentions or future strategies that are signified by the words "expect," "anticipate," "intend," "believe," or similar language. All forward-looking statements included in this document are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. Our business and financial performance are subject to substantial risks and uncertainties. Actual results could differ materially from those projected in the forward-looking statements. In evaluating our business, you should carefully consider the information set forth under the heading "Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021. Readers are cautioned not to place undue reliance on these forward-looking statements. Overview 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 in Asia, North Americaand Europe. In Australia, 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 in U.S.from 2020 and engage in roofing and solar energy systems installation in U.S.from 2021.
Our liquidity position has deteriorated since 2015. We suffered a net loss of
$6.8 millionduring the three months ended March 31, 2022, and the cash flow used in operating activities was $8.6 million. For a detailed discussion, please see "Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources".
Basis of presentation, management estimates and significant accounting policies
Our unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in
the United States of America(" U.S.GAAP") and include the accounts of our company, and all of our subsidiaries. We prepare financial statements in conformity with U.S.GAAP, which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities on the date of the financial statements and the reported amounts of revenues and expenses during the financial reporting period. We continually evaluate these estimates and assumptions based on the most recently available information, our own historical experience and various other assumptions that we believe to be reasonable under the circumstances. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from those estimates. Some of our accounting policies require higher degrees of judgment than others in their application. In order to understand the significant accounting policies that we adopted for the preparation of our condensed consolidated interim financial statements, readers should refer to the information set forth in Note 3 "Summary of significant accounting policies" to our audited financial statements in our 2021 Form 10-K.
Key Factors Affecting Our Results of Operations
We believe that the following factors have had, and expect to continue to have, a material impact on the development of our business, financial condition and results of operations.
The pandemic of a novel coronavirus (COVID-19) has resulted in a widespread health crisis that has adversely affected the economies and financial markets worldwide. Governmental authorities have recommended or ordered the limitation or cessation of certain business or commercial activities in jurisdictions in which we do business or have operations. While some of these orders permit the continuation of essential business operations, or permit the performance of minimum business activities, these orders are subject to continuous revision or may be revoked or superseded, or our understanding of the applicability of these orders and exemptions may change at any time. In response to these orders, we have reduced the risk of exposure to infection, including reduced travel, cancellation of meetings and events, and implementation of work-at- home policies. 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 our
U.S.subsidiary's business on roofing and solar energy systems installation and sales and leasing of EVs, respectively. As the COVID-19 spread continues, the measures implemented to curb the spread of the virus have resulted in supply chain disruptions, insufficient work force and suspended manufacturing and construction works for solar industry. One or more of our customers, partners, service providers or suppliers may experience financial distress, delayed or defaults on payment, file for bankruptcy protection, sharp diminishing of business, or suffer disruptions in their business due to the outbreak. These preventative measures have also impacted our daily operations. The efforts enacted to control COVID-19 have placed heavy pressure on our marketing and sales activities. We continue to assess the related risks and impacts COVID-19 pandemic may have on our business and our financial performance. In light of the rapidly changing situation across different countries and regions, it remains difficult to estimate the duration and magnitude of COVID-19 impact. Until such time as the COVID-19 pandemic is contained or eradicated and global business return to more customary levels, our business and financial results may be materially adversely affected. 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.
In the long term, as PV technology advances and average system costs for solar projects decline, we expect the electricity market in an increasing number of countries to reach grid parity. As the photovoltaic industry becomes more competitive with other energy industries and widespread grid parity strengthens demand for solar projects, we expect our sales costs to decline and our revenues and profitability to increase. .
In addition, the medium-duty EV market is expected to grow significantly over the next decade. While the market has been too slow to expand over the last many years, 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 in Los Angeles, Orange County, and New York; and large corporate fleet owners like Genentech, 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 as Californiaand Australiato continue to grow, while we expect new growth from markets to emerge such as Florida, Texasand US Northeast. As the overall market grows we expect our costs of sales to decrease and our revenue and profitability to increase. 4
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 in
Europe, notably Italy, Germany, France, Belgiumand Spain, certain countries in Asia, including Japan, Indiaand South Korea, as well as Australiaand the United Stateshave 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 like Californiaare mandating key end user segments to switch to zero emission transportation options. Some of the key regulations driving growth in our addressable market include, in California, requiring all transit buses to be zero emissions by 2040, requiring all airport shuttles to be electric by 2035, requiring at least 50% of all medium-duty trucks sold in the state to be electric by 2030, and requiring specific end-user segments like drayage and
yard trucks to go electric.
Other states like
New York, New Jerseyand Massachusettsare also expected to bring in regulatory requirements for key end user segments like transit agencies and school buses to switch to all electric vehicles. Fifteen other states, including Connecticut, Colorado, Hawaii, Maine, Maryland, Massachusetts, New Jersey, New York, North Carolina, Oregon, Pennsylvania, Rhode Island, Vermont, and Washingtonhave committed to follow California'sClean Truck Regulation. Various state and federal agencies are also supporting the switch to zero emission transportation by providing a host of funding and incentive support to develop, demonstrate and deploy zero emission transportation solutions. This is primarily driven by the urgent need to meet carbon and greenhouse gas emission reduction targets. Some of the key funding / incentives driving adoption of electric medium duty vehicles include: the California HVIP program offering a minimum of $60,000per vehicle as incentive for Class 4 electric vehicles registered and operating in the state, the New York Truck Voucher Incentive Program offering up to $66,000per Class 4 electric vehicle, funding from federal agencies like the FTA, covering 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 Commissionand the California Public Utilities Commissionhave approved funding up to 100% of the cost of setting up chargers and related infrastructure. Large utilities like Southern California Edison, Pacific Gas & Electric and San Diego Gas & Electrichave 'Charge Ready' programs that cover the entire cost of setting up charging infrastructure. Other states like New York, Chicago, North Carolina, Tennessee, Texasand Ohiohave also introduced programs to support fleets with their charging infrastructure requirements.
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. 5
Results of operations for the three months ended
The following table sets forth a summary, for the periods indicated, of our consolidated results of operations (in thousands) 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. For the Three Months Ended March 31, 2022 2021 (Unaudited) (Unaudited) Net sales
$ 38,535100.0% $ 33,622100.0% Cost of revenues 35,826 93.0% 31,484 93.6% Gross profit 2,709 7.0% 2,138 6.4% Operating expenses: General and administrative 9,128 23.7% 9,595 28.5% Sales, marketing and customer service 1,243 3.2% 1,037 3.1% Reversal for credit losses (683 ) -1.8% - - Total operating expenses 9,688 25.1% 10,632 31.6% Operating loss (6,979 ) -18.1% (8,494 ) -25.3% Other (income) expense: Interest expenses, net 1,401 3.6% 1,443 4.3% Net foreign exchange gain (1,062 ) -2.8% (1,502 ) -4.5% Others (788 ) -2.0% (649 ) -1.9% Total other income, net (449 ) -1.2% (708 ) -2.1% Loss before income taxes (6,530 ) -16.9% (7,786 ) -23.2% Income taxes expense 256 0.7% 314 0.9% Net loss $ (6,786 )-17.6% $ (8,100 )-24.1% Net sales - Net sales were $38.5 millionand $33.6 millionfor the three months ended March 31, 2022and 2021, respectively, representing an increase of $4.9 millionor 14.6%. The increase in net sales for the three months ended March 31, 2022over the comparative period was primarily due to the increase of revenue from roofing and solar installation of $5.8 million. Cost of revenues - Cost of revenues was $35.8 million(93.0% of net sales) and $31.5 million(93.6% of net sales) for the three months ended March 31, 2022and 2021, respectively, representing an increase of $4.3 millionor 13.8%. The increase in cost of goods sold was consistent with the increase of net sales. Gross profit - Our gross profit increased from $2.1 millionin the three months ended March 31, 2021to $2.7 millionin the three months ended March 31, 2022. Gross margins were 7.0% and 6.4% for the three months ended March 31, 2022and 2021, respectively. The increase in gross margin was primarily due to the increase in GP% of roofing and solar energy system installation. The Company started such business in late February 2021and incurred significant inefficient indirect cost during the three months ended March 31, 2021. After ten months experience, such inefficient indirect costs decreased significantly and the GP% accordingly in the three months ended March 31, 2022. 6 General and administrative expenses - General and administrative expenses were $9.1 million(23.7% of net sale) and $9.6 million(28.5% of net sale) for the three months ended March 31, 2022and 2021, respectively, representing a decrease of $0.5 million, or 4.9%. The decrease was mainly due to the decrease in stock-based compensation expense and was partially net off by the increase of the expense from U.S.subsidiary's business on roofing and solar energy systems installation, which started to operate since February 2021as well as the increase in salaries and wages. Sales, marketing and customer service expenses - Sales, marketing and customer service expenses were $1.2 million(3.2% of net sales) and $1.0 million(3.1% of net sales) for the three months ended March 31, 2022and 2021, respectively, representing an increase of $0.2 million, or 19.9%. The increase in our sales, marketing and customer service expenses was mainly due to the increase of employees' salaries. Reversal for credit loss - In the three months ended March 31, 2022, we reversed credit loss provision of $0.7 million, primarily due to the strengthening monitoring on accounts receivable collection. There was no reversal or provision for credit loss in the three months ended March 31, 2021. Interest expense, net - Interest expense net was $1.4 million(3.6% of net sales) and $1.4 million(4.3% of net sales) for the three months ended March 31, 2022and 2021, respectively. The interest expense net kept stable as there was no significant change in convertible bonds and borrowings. Net foreign exchange gain - We had a net foreign exchange gain of $1.1 million(2.8% of net sales) and $1.5 million(4.5% of net sales) for the three months ended March 31, 2022and 2021, respectively. Others - We generated other income of $0.8 million(2.0% of net sales) and $0.6 million(1.9% of net sales) in the three months ended March 31, 2022and 2021. The other income in the three months ended March 31, 2022mainly represents the gain on disposal for bitcoin equipment of $0.5 million. The other income in the three months ended March 31, 2021mainly represents the gain on forward contracts of $0.6 million. Income tax expense - We had a provision for income taxes of $0.3 million(0.7% of net sales) and $0.3 million(0.9% of net sales) for the three months ended March 31, 2022and 2021, respectively. The income tax expense kept stable as there was no significant change in profit before tax of our subsidiary in Australia. Net loss - For the foregoing reasons, we incurred a net loss of $6.8 million(17.6% of net sales) for the three months ended March 31, 2022, representing an decrease of net loss of $1.3 millioncompared to a net loss of $8.1 million(24.1% of net sales) for the three months ended March 31, 2021.
Cash and capital resources
Historically, we have funded our operations primarily through cash flows from bank borrowings, funding from the issuance of convertible bonds, operating activities, and proceeds from private placements and registered offerings.
December 31, 2021, we had $17.8 millionin cash and cash equivalents, and restricted cash. As of March 31, 2022, we had $12.9 millionin cash and cash equivalents, and restricted cash. We suffered a net loss of $6.8 millionduring the three months ended March 31, 2022, and the cash flow used in operating activities was $8.6 million. As of March 31, 2022, there is net working capital deficit of $93.0 millionand accumulated deficit of $644.2 million. These factors raise substantial doubt as to the Group's ability to continue as a going concern. We intend to continue implementing various measures to boost revenue and control the cost and expenses within an acceptable level and other measures including: 1) negotiate with potential buyers on PV solar projects; 2) negotiate for postponing of convertible bond payments; 3) improve the profitability of the business in US; 4) obtain equity financing from certain subsidiaries' initial public offerings; 5) strictly control and reduce business, marketing and advertising expenses and 6) seek for certain credit facilities. While we believe that it will be successful in meeting its liquidity and cash flow requirements, there is no assurance to that effect. Our condensed consolidated financial statements do not include any adjustments that may result from the outcome of these uncertainties. 7 A summary of the sources and uses of cash and cash equivalents is as follows (in thousands): For the Three Months Ended March 31, 20222021 (Unaudited) (Unaudited)
Net cash used in operating activities $ (8,583 ) $ (4,008 ) Net cash generated from (used in) investing activities 1,096 (7,908 ) Net cash generated from financing activities 2,129 3,918 Effect of exchange rate changes on cash 370 (1,122 ) Net decrease in cash, cash equivalents and restricted cash $ (4,988 ) $ (9,120 ) Operating Activities
Net cash used in operating activities was
$8.6 millionfor the three months ended March 31, 2022, primarily as a result of (i) net loss of $6.8 million, (ii) increase in inventories of $4.6 million, (iii) increase in accounts receivable of $2.0 million, and (iv) increase in project assets of $2.0 million; the decrease was partially offset by (i) depreciation and amortization expense of $0.7 million, (ii) increase in accounts payable of $1.7 million, (iii) increase in accrued liabilities and other liabilities of $1.8 million, (iv) decrease in prepaid expenses and other current assets of $1.3 million, and (v) stock-based compensation expense of $1.2 million. Net cash used in operating activities was $4.0 millionfor the three months ended March 31, 2021, primarily as a result of (i) net loss of $8.1 million, (ii) increase in inventories of $4.8 million, and (iii) increase in prepaid expenses and other assets of $3.1 million; the decrease was partially offset by (i) increase in accounts payable of $5.5 million, (ii) decrease in project assets of $2.1 million, (iii) increase in advances from customers of $1.6 million, and (iv) stock-based compensation expense of $3.1 million. Investing Activities
Net cash generated by investing activities was
Net cash used in investing activities was
$7.9 millionfor three months ended March 31, 2021, primarily as a result of cash paid for asset purchase of PDI in the amount of $8.0 million. Financing Activities
The net cash generated by financing activities was
Net cash generated from financing activities was
$3.9 millionfor the three months ended March 31, 2021, primarily consisted of (i) proceeds from issuance of ordinary shares of $13.6 million, (ii) proceeds from issuance of convertible note of $4.0 million, partially offset by (i) repayment of convertible notes of $13.4 million, (ii) net repayment of borrowings of $0.9 million. 8 Capital Expenditures We incurred capital expenditures of $0.2 millionand $8.0 millionfor the three months ended March 31, 2022and 2021, respectively. Capital commitments amounted to approximately $9.8 millionas of March 31, 2022. These capital commitments were solely related to contracts signed with vendors for procurement of services, automation production line, equipment or PV related products used for the construction of solar PV systems being developed by us. We expect to finance construction of these projects using cash from our operations and private placements, registered offerings, bank borrowings as well as other third-party financing options. Trend information 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 our U.S.subsidiary's business on roofing and solar energy systems installation and sales and leasing of EVs, respectively. As the COVID-19 spread continues, the measures implemented to curb the spread of the virus have resulted in supply chain disruptions, insufficient work force and suspended manufacturing and construction works for solar industry. In light of the rapidly changing situation across different countries and regions, it remains difficult to estimate the duration and magnitude of COVID-19 impact. Other than as disclosed elsewhere in this quarterly report, we are not aware of any trends, uncertainties, demands, commitments or events for the three months ended March 31, 2022that 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.
Off-balance sheet arrangements
March 31, 2022, we had no off-balance sheet arrangements that are or have been reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that are material to investors. 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 unaudited condensed 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.
For more information about our contractual obligations, commitments and contingencies, see Note 8 to the unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report Form 10-Q.
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