Cenntro Electric Group Limited (Nasdaq: CENN) — Q1 2023 Form 10-Q
Business context and reporting period
Cenntro designs and manufactures purpose-built electric commercial vehicles for last-mile delivery and industrial uses. This unaudited report covers the three months ended March 31, 2023, with comparisons to Q1 2022. Amounts are in U.S. dollars.
Financial and operating results
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Revenue | $3.47 million | $1.83 million |
| Gross profit and margin | $194,744; 5.6% | $363,030; 19.8% |
| Operating loss | $10.60 million | $9.37 million |
| Net loss | $11.11 million | $9.35 million |
| Net loss attributable to shareholders | $10.96 million | $9.31 million |
| Net cash used in operations | $17.36 million | $23.49 million |
- Revenue rose 89.6%, while vehicles sold fell to 129 from 151. Vehicle sales were $2.84 million and spare-parts sales $598,036. Europe accounted for 88.2% of revenue, compared with 33.7% a year earlier.
- Vehicle gross margin fell to 1.63% from 19.7%. Management attributed the decline to competitive pricing for the Logistar 200 and negative margins on newly introduced LS100, LS260 and Teemak models.
- Adjusted EBITDA, a non-GAAP measure, was a loss of $9.23 million, versus a loss of $773,546. The prior-year result included an $8.30 million adjustment for a one-off payment inherited from Naked Brand Group; the company cautions that this measure has limitations and may not be comparable across companies.
- Cash and cash equivalents were $91.85 million at March 31, down from $153.97 million at December 31, 2022. Cash, cash equivalents and restricted cash decreased $62.16 million during the quarter. Investing activities used $5.49 million; financing activities used $39.58 million, mainly for convertible-note redemptions.
- Working capital was approximately $117.2 million. Total liabilities were $58.54 million. Convertible promissory notes were carried at $17.90 million; operating lease liabilities totaled $14.42 million.
Material changes and unusual items
- The company redeemed approximately $39.6 million of convertible notes during Q1. The remaining notes were due July 19, 2023, bore 8% interest and included holder redemption rights under specified conditions. On April 26, 2023, investors redeemed a further $6 million.
- Cenntro acquired the remaining 35% of Cenntro Automotive Europe GmbH (CAE) on January 31, making CAE wholly owned. The transaction was accounted for as an equity transaction.
- Q1 included a $1.15 million impairment of the Antric GmbH investment and a $653,016 fair-value gain on equity securities. Share-based compensation was $1.15 million.
- Inventory increased to $36.55 million from $31.84 million, including $24.79 million of finished goods. Net accounts receivable increased to $2.73 million from $565,398.
Outlook, risks and contingencies
- Management said available cash should fund its strategy for the 12 months following issuance of the annual report. Plans include rolling out models in North America and Europe, establishing local assembly facilities and expanding the Changxing factory. The company also expects R&D, selling and marketing, and general and administrative costs to rise as it pursues growth.
- Plans depend on execution, vehicle demand and collections, manufacturing costs, facility and product-launch costs, and access to additional financing on acceptable terms. Management described regionalized manufacturing and supply chains as a longer-term objective.
- The company disclosed a Belgian court order requiring cessation of Metro-model distribution there in a dispute with Sevic over intellectual property. The filing says Cenntro believes no Metro vehicles were sold in Belgium, intends to appeal, and accrued the liability; the amount accrued is not clearly stated. The stated maximum penalties were €500,000 for distributor LEIE and €1 million for CAE.
- Other disclosed matters include a Sevic contract claim seeking approximately $628,109, an arbitration claim by an affiliate seeking $1.13 million, and a stock-option lawsuit seeking $19 million plus other amounts. Outcomes are uncertain.
- Management reported that disclosure controls were not effective at March 31 because previously identified material weaknesses in internal control over financial reporting remained. A remediation plan was underway, but management had not concluded the weaknesses were remediated.
Important facts for investors to verify
- Reconcile reported gross profit and operating expenses: the MD&A contains inconsistent descriptions and amounts for general and administrative expense, while the financial statements report gross profit of $194,744 and G&A expense of $7.36 million.
- Check the status and settlement of the notes due July 2023, related redemption rights, and the company’s cash position after subsequent events and planned expansion spending.
- Track vehicle-level margins, sales volumes, inventory conversion and receivable collections, particularly given weak Q1 vehicle margins and higher finished-goods inventory.
- Review the Belgian injunction, accrued liability and appeal, as well as the other legal proceedings and their potential financial effects.
- Monitor remediation and testing of the disclosed internal-control material weaknesses. The filing also refers to plans to regain Nasdaq compliance, including a possible reverse stock split, but provides no specific timing or outcome.