Cenntro Inc.: Form 10-Q for the period ended Sep 30, 2023

Introductory Note

Except as otherwise indicated by the context, references in this Quarterly Report on Form 10-Q (this “Form 10-Q”) to the “Company,” “Cenntro,” “we,” “us” or “our” are references to the combined business Cenntro Electric Group Limited ACN 619 054 938 and its subsidiaries. The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) summarizes the significant factors affecting our results of operations, liquidity, capital resources and contractual obligations. The following discussion and analysis should be read in conjunction with the Company’s unaudited condensed consolidated financial statements and related notes included elsewhere herein.

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 also include Cenntro Branded EV Centers globally. 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 the Logistar™ 200, Logistar™ 100, Logistar™ 260, Teemak™ and Neibor® 150 in Europe.

Net revenues ended September 30, 2023 and 2022 were generated from (a) vehicles sales, which primarily represent net revenues from sales of Metro® vehicles (including vehicle kits), Logistar™ 200, Logistar™ 260 and Logistar™ 100, (b) sales of ECV spare-parts related to our Metro® vehicles, and (c) other sales, which primarily were: (i) the sales of inventory of outsourced ECV batteries and (ii) charges on services provided to channel partners for technical developments and assistance with vehicle homologation or certification.

Cost of goods sold

Cost of goods sold mainly consists of production-related costs including costs of raw materials, consumables, direct labor, overhead costs, depreciation of plants and equipment, manufacturing waste treatment processing fees and inventory write-downs. We incur cost of goods sold in relation to (i) vehicle sales and spare-part sales, including, among others, purchases of raw materials, labor costs, and manufacturing expenses that related to ECVs, and (ii) other sales, including cost and expenses that are not related to ECV sales.

The cost of goods sold also includes inventory write-downs. Inventories are stated at a lower of cost or net realizable value. The cost of raw materials is determined on the basis of the weighted average. The cost of finished goods is determined on the basis of weighted average and is comprised of direct materials, direct labor cost and an appropriate proportion of overhead. Net realizable value is based on estimated selling prices less selling expenses and any further costs of completion. Adjustments to reduce the cost of inventory to net realizable value are made, if required, for estimated excess, obsolescence, or impaired balances. Write-downs are recorded in the cost of goods sold in our statements of operations and comprehensive loss.

Operating expenses

Our operating expenses consist of general and administrative, selling and marketing expenses, and research and development expenses. General and administrative expenses are the most significant components of our operating expenses. Operating expenses also include provision for doubtful accounts and impairment loss for long-lived assets.

Research and Development Expenses

Research and development expenses consist primarily of employee compensation and related expenses, prototype expenses, costs associated with assets acquired for research and development, product development costs, production inspection and testing expenses, product strategic advisory fees, third-party engineering and contractor support costs and allocated overhead. We expect our research and development expenses to increase as we continue to invest in new ECV models, new materials and techniques, vehicle management and control systems, digital control capabilities and other technologies.

Selling and Marketing Expenses

Selling and marketing expenses consist primarily of employee compensation and related expenses, sales commissions, marketing programs, freight costs, travel and entertainment expenses and allocated overhead. Marketing programs consist of advertising, tradeshows, events, corporate communications and brand-building activities. We expect our selling and marketing expenses to increase as we introduce our new ECV models, further develop additional local dealership and service support networks to augment our expanding sales globally.

General and Administrative Expenses

General and administrative expenses consist primarily of employee compensation and related expenses for administrative functions including finance, legal, human resources, and fees for third-party professional services. While we will continue to monitor general and administrative expenses, we expect general and administrative expenses to materially increase over the next two years in connection with the execution of our growth strategy, including the regionalization of our manufacturing and supply chain and expanded product offerings and expenses relating to being a public company.

Provision for doubtful accounts

A provision for doubtful accounts is recorded for periods in which we determine a loss is probable, based on our assessment of specific factors, such as troubled collections, historical experience, accounts aging, ongoing business relations and other factors. Account balances are charged off against the provision after all means of collection have been exhausted and the potential for recovery is considered remote.

Impairment loss for long-lived assets

We evaluate the recoverability of long-lived assets or asset group with determinable useful lives whenever events or changes in circumstances indicate that an asset or a group of assets’ carrying amount may not be recoverable. We measure the carrying amount of long-lived assets 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 becomes 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 becomes 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, 2023 and 2022.

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Gross margin of vehicle sales. The gross margin of vehicle sales is defined as gross profit of vehicle sales divided by total revenue of vehicle sales.

Results of Operations

The following table sets forth a summary of our statements of operations for the periods indicated:

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Comparison of the Three and Nine Months ended September 30, 2023 and 2022

Net Revenues

The following table presents our net revenue components by amount and as a percentage of the total net revenues for the periods presented.

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Net revenues for the nine months ended September 30, 2023 were approximately $13.5 million, an increase of approximately $6.3 million or 88.9% from approximately $7.1 million for the nine months ended September 30, 2022. The increase in net revenues in 2023 was primarily attributed to an increase in vehicle sales by approximately $6.0 million due to the improvement of average selling price from approximately $16,625 to $19,234, and an increase in spare-part sales by approximately $0.4 million.

Net revenues for the three months ended September 30, 2023 were approximately $5.8 million, an increase of approximately $3.7 million or 174.9% from approximately $2.1 million for the three months ended September 30, 2022. The increase in net revenues in 2023 was primarily attributed to an increase in vehicle sales by approximately $3.6 million due to the increase of sales volume of 228 units, and an increase in spare-part sales by approximately $0.1 million.

For the nine months ended September 30, 2023, we sold 662 ECVs, 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, compared with 407 ECVs for the nine months ended September 30, 2022, including 171 fully assembled Metro® vehicle units, 48 vehicle kits, 186 fully assembled Logistar™ 200 units, one fully assembled Teemak™ unit and one fully assembled Neibor® 150 unit. Other than the ECVs, we also sold 104 iChassis™ units during the period.

For the three months ended September 30, 2023, we sold 298 ECVs, 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, compared with 70 ECVs for the three months ended September 30, 2022, including 16 fully assembled Metro® vehicle units and 54 fully assembled Logistar™ 200 units. Other than the ECVs, we also sold 103 iChassis™ units during the period.

Geographically, the vast majority of our net revenues were generated from vehicle sales in the European Union during the nine months ended September 30, 2023 and 2022. For the nine months ended September 30, 2023, net revenues from Europe, North America, and Asia (including China) as a percentage of total revenues was 74.5%, 3.4%, and 22.1%, respectively, compared to 78.8%, 6.4%, and 13.9%, respectively for the corresponding period in 2022.

For the nine months ended September 30, 2023, net revenues from vehicle sales in Europe, North America, and Asia (including China) as a percentage of total vehicle net revenues was 77.6%, 3.3%, and 19.1%, respectively, compared to 81.4%, 6.3%, and 12.3%, respectively, for the corresponding period in 2022.

Cost of goods sold

The following table presents our cost of goods sold by amount and as a percentage of the total cost of goods sold for the periods presented.

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Cost of goods sold for the nine months ended September 30, 2023 was approximately $11.4 million, an increase of approximately $4.2 million or approximately 57.7% from approximately $7.2 million for the nine months ended September 30, 2022. The increase of cost of vehicle sales was mainly caused by the increased per vehicle cost of newly introduced model of Logistar® 260, Logistar® 400 and Avantier™, offset by the decrease of inventory write down of approximately $0.6 million.

Cost of goods sold for the three months ended September 30, 2023 was approximately $5.0 million, an increase of approximately $2.3 million or approximately 84.7% from approximately $2.7 million for the three months ended September 30, 2022.

Gross Profit/(Loss)

Gross Profit for the nine months ended September 30, 2023 was approximately $2.1 million, an increase of approximately $2.2 million from approximately $0.1 million of gross loss for the nine months ended September 30, 2022. For the nine months ended September 30, 2023 and 2022, our overall gross margin was approximately 15.3% and -1.4%, respectively. Our gross margin of vehicle sales for the nine months ended September 30, 2023 and 2022 was 16.3% and -3.6%, respectively. The increase of our overall gross profit was caused by less impairment of inventory recognized in the nine months ended September 30, 2023 compared with the same period in 2022. There was no inventory write-down for the nine months ended September 30, 2023 compared to an inventory write-down of approximately $0.6 million in the same period of 2022.

Gross Profit for the three months ended September 30, 2023 was approximately $0.7 million, an increase of approximately $1.4 million from approximately $0.6 million of gross loss for the three months ended September 30, 2022. For the three months ended September 30, 2023 and 2022, our overall gross margin was approximately 12.4% and -30.3%, respectively. Our gross margin of vehicle sales for the three months ended September 30, 2023 and 2022 was 15.8% and -34.8%, respectively. The increase of our overall gross profit was caused by less impairment of inventory recognized in the three months ended September 30, 2023 compared with the same period in 2022.

Selling and Marketing Expenses

Selling and marketing expenses for the nine months ended September 30, 2023 were approximately $7.2 million, an increase of approximately $3.0 million or approximately 69.9% from approximately $4.3 million for the nine months ended September 30, 2022. The increase in selling and marketing expenses in 2023 was primarily attributed to the increase in salary expenses, share-based compensations and marketing related professional fee of approximately $1.7 million, $0.2 million and $1.0 million, respectively.

Selling and marketing expenses for the three months ended September 30, 2023 were approximately $2.6 million, an increase of approximately $1.0 million or approximately 60.8% from approximately $1.6 million for the three months ended September 30, 2022. The increase in selling and marketing expenses in 2023 was primarily attributed to the increase in salary expenses and marketing related professional fee of approximately $0.2 million and $0.8 million, respectively.

General and Administrative Expenses

General and administrative expenses for the nine months ended September 30, 2023 were approximately $25.7 million, a decrease of approximately $0.7 million or approximately 2.8% from approximately $26.4 million for the nine months ended September 30, 2022. The decrease in general and administrative expenses in 2023 was primarily attributed to a decrease in in salary and social insurance, and stripping fee of approximately $4.1 million and $1.8 million, respectively, offset by the increase in share-based compensation, lease ROU amortization and office expenses of approximately $1.6 million, $1.4 million and $1.7 million, respectively.

General and administrative expenses for the three months ended September 30, 2023 were approximately $9.1 million, an increase of approximately $2.9 million or approximately 45.8% from approximately $6.2 million for the three months ended September 30, 2022. The increase in general and administrative expenses in 2023 was primarily attributed to an increase in salary and social insurance and legal, share-based compensation and Right of Use amortization $1.2 million, $0.8 million and $0.7 million, respectively.

Research and Development Expenses

Research and development expenses for the nine months ended September 30, 2023 were approximately $5.3 million, an increase of approximately $1.7 million or approximately 48.1% from approximately $3.6 million for the nine months ended September 30, 2022. The increase in research and development expenses in 2023 was primarily attributed to the increase in design and development expenditures and salary expense of approximately $0.5 million and $1.1 million, respectively.

Research and development expenses for the three months ended September 30, 2023 were approximately $1.6 million, a decrease of approximately $0.2 million or approximately 9.0% from approximately $1.8 million for the three months ended September 30, 2022. The decrease in research and development expenses in 2023 was primarily attributed to i) the decrease in design and development expenditures of approximately $0.5 million, offset by the increase in salary expense of approximately $0.2 million.

Interest income (expense), net

Interest expense, net, mainly consists of interest on convertible bonds. Net interest expense was approximately $0.1 million for the nine months ended September 30, 2023, an increase of approximately $0.3 million or approximately 178.2% compared to the approximately $0.2 million in interest income for the nine months ended September 30, 2022. The increase was primarily attributable to an increase 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 $ 0.08 million for the three months ended September 30, 2023, a slight decrease of approximately $0.03 million or approximately 23.6% compared to the approximately $0.1 million in interest income for the three months ended September 30, 2022. The increase was primarily attributable to a decrease in interest expense to convertible bonds of approximately $0.4 million, offset by the increase in interest income of approximately $0.3 million.

Other income (expense), net

Other expense, net for the nine months ended September 30, 2023 was approximately $0.9 million, representing a decrease of approximately $1.9 million compared to approximately $2.7 million of other expense, net for the nine months ended September 30, 2022. The change of other income in 2023 compared to 2022 was primarily attributable to (i) a decrease in loss on foreign currency exchange of approximately $1.5 million, (ii) an increase in gain on investment of approximately $0.2 million.

Other expense, net for the three months ended September 30, 2023 was approximately $0.1 million, representing a decrease of approximately $3.4 million compared to approximately $3.5 million of other expense, net for the three months ended September 30, 2022. The change of other income in 2023 compared to 2022 was primarily attributable to a decrease of approximately $3.4 million in loss on foreign currency exchange.

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, 2023 and 2022 was approximately $0.09 million and $4.3 million, respectively. The implied price volatility of the convertible promissory notes and derivative liability were relatively stable during the nine months ended 2023.

A gain in the change in fair value of convertible promissory notes and derivative liability for the three months ended September 30, 2023 and 2022 was approximately $0.02 million and $4.3 million, respectively.

Change in fair value of equity securities

A loss in the change in fair value of equity securities for the nine months ended September 30, 2023 was approximately $1.2 million compared to approximately $0.2 million of a gain in the change in fair value of equity securities for the nine months ended September 30, 2022. The decrease was attributed to a downward adjustment of approximately $1.9 million due to the fair value change of our investment on participating shares in Micro Money Fund SPC with an original investment value of $5 million, offset by an upward adjustment of approximately $0.7 million from our investment on partnership shares in MineOne Fix Income Investment I L.P with an original investment value of $25 million.

A loss in the change in fair value of equity securities for the three months ended September 30, 2023 was approximately $1.9 million compared to approximately $0.2 million of a gain in the change in fair value of equity securities for the three months ended September 30, 2022. The decrease was attributed to a downward adjustment of approximately $2.1 million due to the fair value change of our investment on participating shares in Micro Money Fund SPC with an original investment value of $5 million, offset by an upward adjustment of approximately $0.2 million from our investment on partnership shares in MineOne Fix Income Investment I L.P with an original investment value of $25 million.

Loss from acquisition of Antric

A loss from acquisition of Antric for the nine months ended September 30, 2023 was approximately $1.3 million compared to nil of loss from acquisition of Antric for the nine months ended September 30, 2022.

A loss from acquisition of Antric for the three months ended September 30, 2023 was approximately $1.3 million compared to nil of loss from acquisition of Antric for the three months ended September 30, 2022.

Impairment of Long-term investments

Impairment of Long-term investments for the nine months ended September 30, 2023 was approximately $1.2 million compared nil of loss from acquisition of Antric for the nine months ended September 30, 2022.

Impairment of Long-term investments for the three months ended September 30, 2023 was approximately three thousand dollar compared nil of loss from acquisition of Antric for the three months ended September 30, 2022.

Non-GAAP Financial Measures

Adjusted EBITDA for the three and nine months ended September 30, 2023 and 2022

In addition to our results determined in accordance with GAAP, we believe Adjusted EBITDA, a non-GAAP measure is useful in evaluating operational performance. We use Adjusted EBITDA to evaluate ongoing operations and for internal planning and forecasting purposes. We believe that non-GAAP financial information, when taken collectively, may be helpful to investors in assessing operating performance.

Adjusted EBITDA is a supplemental measure of our performance that is not required by, or presented in accordance with, GAAP. Adjusted EBITDA is not a measurement of our financial performance under GAAP and should not be considered as an alternative to net income or any other performance measure derived in accordance with GAAP. We define Adjusted EBITDA as net income (or net loss) before net interest expense, income tax expense, depreciation and amortization as further adjusted to exclude the impact of stock-based compensation expense and other non-recurring expenses including expenses related to TME Acquisition, expenses related to one-off payment inherited from the original Naked Brand Group, impairment of goodwill, convertible bond issuance fee, loss on redemption of convertible promissory notes, loss on exercise of warrants, and change in fair value of convertible promissory notes and derivative liability.

We present Adjusted EBITDA because we consider it to be an important supplemental measure of our performance and believe it is frequently used by securities analysts, investors, and other interested parties in the evaluation of companies in our industry. Management believes that investors’ understanding of our performance is enhanced by including this non-GAAP financial measure as a reasonable basis for comparing our ongoing results of operations. Management uses Adjusted EBITDA:

• as a measurement of operating performance because it assists us in comparing the operating performance of our business on a consistent basis, as it removes the impact of items not directly resulting from our core operations;
• for planning purposes, including the preparation of our internal annual operating budget and financial projections;
• to evaluate the performance and effectiveness of our operational strategies; and
• to evaluate our capacity to expand our business.

By providing this non-GAAP financial measure, together with the reconciliation, we believe we are enhancing investors’ understanding of our business and our results of operations, as well as assisting investors in evaluating how well we are executing our strategic initiatives. We caution investors that amounts presented in accordance with our definition of Adjusted EBITDA may not be comparable to similar measures disclosed by our competitors because not all companies and analysts calculate Adjusted EBITDA in the same manner. Adjusted EBITDA has limitations as an analytical tool, and should not be considered in isolation, or as an alternative to, or a substitute for net income or other financial statement data presented in our financial statements as indicators of financial performance. Some of the limitations are:

• such measures do not reflect our cash expenditures;
• such measures do not reflect changes in, or cash requirements for, our working capital needs;
• although depreciation and amortization are recurring, non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future and such measures do not reflect any cash requirements for such replacements; and
• the exclusion of stock-based compensation expense, which has been a significant recurring expense and will continue to constitute a significant recurring expense for the foreseeable future, as equity awards are expected to continue to be an important component of our compensation strategy.

Due to these limitations, Adjusted EBITDA should not be considered as a measure of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our GAAP results and using these non-GAAP measures only supplementally. As noted in the table below, Adjusted EBITDA includes adjustments to exclude the impact of stock-based compensation expense and material infrequent items. It is reasonable to expect that these items will occur in future periods. However, we believe these adjustments are appropriate because the amounts recognized can vary significantly from period to period, do not directly relate to the ongoing operations of our business and may complicate comparisons of our internal operating results and operating results of other companies over time. In addition, Adjusted EBITDA may include adjustments for other items that we do not expect to regularly occur in future reporting periods. Each of the normal recurring adjustments and other adjustments described in this paragraph and in the reconciliation table below help management with a measure of our core operating performance over time by removing items that are not related to day-to-day operations.

The following table reconciles Adjusted EBITDA to the most directly comparable GAAP financial performance measure, which is net loss:

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B. Liquidity and Capital Resources

We have historically funded working capital and other capital requirements primarily through bank loans, equity financing and short-term loans. Also, the reverse recapitalization 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 30,2023, we had approximately $44.6 million in cash and cash equivalents, approximately $4.6 million of accounts receivables, and approximately $43.1 million of inventory as compared to approximately $200.4 million in cash and cash equivalents, $2.4 million in accounts receivable, and $22.2 million in inventory as of September 30,2022. For the nine months ended September 30, 2023 and 2022, net cash used in operating activities was approximately $45.6 million and $47.7 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-month 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 the European Union and (iii) additional plants and equipment for the expansion of our Changxing factory. Actual results could vary materially as a result of a number of factors, including:

• The costs of bringing our new facilities into operation;
• The timing and costs involved in rolling out new ECV models to market;
• Our ability to manage the costs of manufacturing our ECVs;
• The costs of maintaining, expanding and protecting our intellectual property portfolio, including potential litigation costs and liabilities;
• Revenues received from sales of our ECVs;
• The costs of additional general and administrative personnel, including accounting and finance, legal and human resources, as well as costs related to litigation, investigations, or settlements;
• Our ability to collect future revenues; and
• Other risks discussed in the section titled “Risk Factors.”

For the twelve months from the date hereof, we also plan to continue implementing measures to increase revenues and control operating costs and expenses, implementing comprehensive budget controls and operational assessments, implementing enhanced vendor review and selection processes as well as enhancing internal controls.

Long-Term Liquidity Requirements

In the long-term, we plan to regionalize the manufacturing and supply chain relating to certain components of our ECVs in the geographic markets in which our ECVs are sold. In the long-term, through our supply chain development know-how, we intend to establish supply chain relationships in North America and the European Union to support anticipated manufacturing and assembly needs in these markets, thereby reducing the time in transit and potentially other landed costs elements associated with importing our components and spare parts from China. Currently, the majority of our revenues are 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, 2023, we have spent over approximately $86.8 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, 2023, our working capital was approximately $84.0 million, as compared to a working capital of approximately $196.0 million as of September 30, 2022. The approximately $112.0 million decrease in working capital during 2023 was primarily due to the decrease of cash and cash equivalents of approximately $155.8 million, the decrease of prepayment and other current assets of approximately $3.9 million, the increase of operating lease liabilities of approximately $2.9 million, offset by the increase in inventories of approximately $20.9 million and decrease in convertible bonds of approximately $30.1 million.

Cash Flow

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Operating Activities

Our net cash used in operating activities was approximately $45.6 million, $47.7 million for the nine months ended September 30, 2023 and 2022, respectively.

Net cash used in operating activities for the nine months ended September 30, 2023 was primarily attributable to (i) our net loss of approximately $41.3 million and adjusted for non-cash items of approximately $16.3 million, which primarily consisted of impairment of long-term investments, foreign currency exchange loss, net, share based compensation expense, loss (gain) on disposal of long-term investment and amortization of operating lease right-of-use asset of approximately $1.2 million, $2.9 million, $4.6 million, $1.2 million and $3.2 million, respectively, (ii) the increase in inventories, accounts receivable, prepayment and other current assets, accrued expense and other current liabilities and operating lease liabilities and of approximately $11.7 million, $4.2 million, $2.4 million, $1.8 million and $2.8 million, respectively, (iii) increase in deferred revenue of approximately $1.3 million.

Investing Activities

Net cash used in investing activities was approximately $12.9 million for the nine months ended September 30, 2023. Net cash used in investing activities for the nine months ended September 30, 2023 was primarily attributable to cash paid purchase for land use rights and property of approximately $2.2 million, additions in long-term investments as a minority interest of approximately $0.7 million, approximately $7.3 million in purchase of plant and equipment and approximately $1.9 million net cash paid in acquisition of 35% of CAE's share and including related expenses.

Financing Activities

Net cash provided by financing activities was approximately $48.1 million for the nine months ended September 30, 2023. Net cash provided by financing activities for the nine months ended September 30, 2023 was primarily attributable to approximately $47.5 million paid due to redemption of convertible bonds and approximately $0.6 million of repayments of bank loans.

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 February 1, 2023 and terminating on January 31, 2025, the annual base rent for the first twelve months the period is $175,500 and the annual base rent for the second twelve months the period is $180,765.

In June 2021, we signed two non-cancellable operating lease agreements for approximately 11,690 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 $171,397 for the term ending May 2022 and $173,987 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 $383,512) for the lease term. Cedar transferred the leasing property to CEGE on February 1, 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 May, 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 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%.

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 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 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. 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 November 28, 2022, we signed a non-cancellable operating lease agreement for approximately 6,510 square feet as an EV center in Dominica Republic. The lease period commenced on December 1, 2022 and ends five years. The rent is $9,000 per month and the annual increase is 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 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 $10,344.77) 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 $1,919.9) 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 $38,916) 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).

On April 4, 2023, we signed a non-cancellable operating lease agreement for approximately 2,500 squares 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.

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 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 $20,468).

We have not entered into any off-balance sheet financial guarantees or other off-balance sheet commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as shareholders’ equity or that are not reflected in our Audited Financial Statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or product development services with us.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with U.S. GAAP requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated and combined financial statements, the reported amounts of revenue and expenses during the reporting period and the related disclosures in the consolidated and combined financial statements and accompanying footnotes. Out of our significant accounting policies, which are described in “Note 2—Summary of Significant Accounting Policies” of our consolidated and combined financial statements for the nine months ended September 30, 2023, 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, 2022, which has been derived from audited financial statements, and the unaudited condensed consolidated financial statements as of September 30,2023 and for the nine months ended September 30, 2023 and 2022 have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”).

Certain information and disclosures, which are normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), have been condensed or omitted pursuant to such rules and regulations. Management believes that the disclosures made are adequate to provide a fair presentation. The interim financial information should be read in conjunction with the financial statements and the notes for the fiscal year ended December 31, 2022. The results of operations for the nine months ended September 30, 2023 are not necessarily indicative of the results for the full year or any future periods.

Use of estimates

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 provision for doubtful accounts, lower of cost and net realizable value of inventories, impairment losses for long-lived assets and investments, valuation allowance for deferred tax assets and fair value measurement for share-based compensation expense, convertible promissory notes and warrants. 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.

Recently issued accounting standards pronouncement

Except for the ASUs (“Accounting Standards Updates”) issued but not yet adopted disclosed in “Note 2 (z) Recent Accounting Standards” of the Company 2022 Form 10-K, there is no ASU issued by the FASB that is expected to have a material impact on the Company’s consolidated results of operations or financial position.

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 estimates 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 occurring 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, 2023 and 2022:

The Company’s revenues are derived from Europe, Asia and America. The following table sets forth disaggregation of revenue by customer location.

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 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, 2023 and 2022, the Company recognized $484,477 and $1,079,090 revenue that was included in contractual liabilities, respectively.

The following table provides information about receivables and contractual liabilities from contracts with customers:

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Recently issued accounting standards pronouncement

Except for the ASUs (“Accounting Standards Updates”) issued but not yet adopted disclosed in “Note 2 (z) Recent Accounting Standards” of the Company 2022 Form 10-K, there is no ASU issued by the FASB that is expected to have a material impact on the Company’s consolidated results of operations or financial position.

As a smaller reporting company as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Company is not required to provide the information required by this item.

Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Roles 12a-15(e) or 15d-15(e) under the Exchange Act) designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required disclosure.

Our management, with the participation of our CEO and CFO, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2023, as required by paragraph (b) of Rules 13a-15 or 15d-15 under the Exchange Act. Based on this evaluation, management concluded that the Company's disclosure controls and procedures was not effective as of September 30, 2023, due to material weaknesses in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) under the Exchange Act) that have been previously identified but continue to exist. See Part II, Item 9A of the 2022 Form 10-K/A for additional information.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting that occurred during the third quarter of fiscal 2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Remediation

As previously described in Part II, Item 9A of our Annual Report on Form 10-K/A for the fiscal year ended December 31,2022, we began implementing a remediation plan to address the material weakness mentioned above. The weakness will not be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.

The following table reconciles the Company‘s balance sheet under U.S. GAAP with its balance sheet under IFRS as of 30 September 2023 and audited balance sheet as of 31 December 2022, respectively:

Unaudited 30 September 2023

(1) Includes (i) $(31,869,457) (2022: $(27,304,456)) in share-based compensation payments. (ii) $2,558,882 recognized in 2023 from the acquisition of 35% of CAE’s equity interest, and (iii) additional equity of $209,429,931 recognized in 2021 from the difference between the deemed transaction price and net assets acquired related to the Combination under IFRS.

(2) Includes (i) a reclassification of Accumulated other comprehensive loss under U.S. GAAP of $(8,701,442) (2022: $(5,306,972)), (ii) a reclassification of Additional paid-in capital under U.S. GAAP of $31,869,457 (2022: $27,304,456) in share-based compensation payments to Reserves under IFRS, and (iii) a reclassification of Additional paid-in capital under U.S. GAAP of $(2,558,882) recognized in 2023 from the acquisition of 35% of CAE’s equity interest to Reserve under IFRS.

The following table reconciles the Company’s statement of operations under U.S. GAAP for the three months ended 30 September 2023 and 2022 with its statement of operations under IFRS for the three months ended 30 September 2023 and 2022, respectively:

Unaudited 30 September 2023

Unaudited 30 September 2022

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The following table reconciles the Company’s statement of operations under U.S. GAAP for the nine months ended 30 September 2023 and 2022 with its statement of operations under IFRS for the nine months ended 30 September 2023 and 2022, respectively:

Unaudited 30 September 2023

Unaudited 30 September 2022

As set forth above, the material differences between the U.S. GAAP and IFRS presentation with respect to the Company’s combined balance sheet as of 30 September 2023 and combined balance sheet as of 31 December 2022 are as follows:

a) The reclassification of “Accumulated other comprehensive loss” under U.S. GAAP to “Reserves” under IFRS;

b) The reclassification of amounts of share-based payments from “Additional paid-in capital” under U.S. GAAP to “Reserves” under IFRS;

c) The reclassification of the amount recognized from the acquisition of 35% of CAE’s equity interest from “Additional paid-in capital” under U.S. GAAP to “Reserves” under IFRS; and

d) Additional equity recognized from the difference between the total deemed transaction price and net assets acquired related to the Combination under IFRS.

e) In 2021, the Company was deemed to have incurred non-cash listing costs of approximately $209.4 million as a result of the IFRS accounting treatment of the Combination, as Cenntro was deemed to have received a 67% controlling interest in CEGL (formerly NBG) and the Company was deemed to have incurred listing costs equaling the difference between the total deemed transaction price and total net assets. Under U.S. GAAP, the Combination is accounted for as a reverse recapitalization, which is equivalent to the issuance of shares by Cenntro for the net assets of CEGL (formerly NBG), accompanied by a recapitalization).

As set forth above, there is no difference between the U.S. GAAP and IFRS presentation as it relates to our combined statement of operations and comprehensive loss for the nine months ended 30 September 2023.

You should carefully consider the risks discussed in the section entitled “Risk Factors” in the 2022 Form 10-K/A, which could materially affect our business, financial condition, or future results. The risks described in the 2022 Form 10-K/A are not the only risks facing the company. Additional risks and uncertainties not currently known to us or that we do not currently deem material, may also materially adversely affect our business, results of operations, cash flows, and financial position.