Cenntro Electric Group Limited (Nasdaq: CENN) — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Unaudited results are presented under U.S. GAAP; comparisons are with the corresponding 2022 periods unless noted. The company designs and manufactures purpose-built electric commercial vehicles for last-mile delivery and industrial applications.
Financial performance
| Metric | Three months ended Sept. 30 | Nine months ended Sept. 30 |
|---|---|---|
| Revenue | $5.76 million; up 174.9% | $13.47 million; up 88.9% |
| Gross profit (margin) | $0.72 million (12.4%); prior-year loss $0.63 million | $2.06 million (15.3%); prior-year loss $0.10 million |
| Operating loss | $12.62 million; prior-year $10.28 million | $36.24 million; prior-year $34.42 million |
| Net loss | $16.10 million; prior-year $15.09 million | $41.29 million; prior-year $38.14 million |
| Adjusted EBITDA (non-GAAP) | Loss of $12.14 million; prior-year loss $11.97 million | Loss of $33.90 million; prior-year loss $24.91 million |
Vehicle sales drove growth: nine-month vehicle revenue was $12.73 million versus $6.77 million. The company sold 662 ECVs in the nine-month period, compared with 407. Europe generated $10.04 million, or about 74.5%, of revenue. Nine-month vehicle gross margin improved to 16.3% from negative 3.6%; management attributed improved overall gross profit in part to no inventory write-down in 2023 versus $0.59 million in 2022. Operating expenses rose to $38.30 million from $34.32 million, including higher selling and marketing and R&D costs.
Cash, liquidity and debt
- At September 30, 2023, cash and cash equivalents were $44.65 million; including restricted cash, total cash was $44.84 million. Cash and cash equivalents were $153.97 million at December 31, 2022.
- For the first nine months, operating cash use was $45.59 million; investing cash use was $12.91 million; and financing cash use was $48.14 million. The cash-flow statement reports a $109.25 million net decrease in cash, cash equivalents and restricted cash.
- Working capital was $84.0 million. Current assets were $110.16 million and current liabilities $26.18 million. Inventory was $43.08 million, up from $31.84 million at year-end 2022.
- Convertible promissory notes were reported at $9.95 million, down from $57.37 million at year-end, following $47.53 million of redemptions. The notes bear 8% interest; remaining maturity is reported as January 19, 2024. Investor and placement-agent warrant liabilities totaled about $15.65 million. Operating lease liabilities totaled $21.62 million.
- Total liabilities were $59.85 million and total equity $132.01 million. The filing does not provide a conventional free-cash-flow measure.
Outlook, risks and notable items
- Management says cash, together with cash-improvement initiatives, should be sufficient to execute its strategy for the 12 months following issuance. The statement is subject to significant uncertainties, including vehicle sales and collections, manufacturing costs, facility start-up costs, and spending on new models and expansion.
- Near-term plans include launching models in North America and Europe, establishing local assembly facilities in the U.S. and EU, and expanding the Changxing factory. Management also plans cost controls, improved inventory turns and continued R&D investment. No quantified revenue or earnings guidance is provided.
- The company acquired the remaining 35% of CAE in January 2023, making it wholly owned, and acquired the remaining 75% of Antric in August 2023. The Antric acquisition resulted in a reported $1.32 million loss. Other notable items include $1.16 million of nine-month impairment on long-term investments and a $1.17 million fair-value loss on equity securities.
- Management concluded disclosure controls were not effective at September 30 because previously identified material weaknesses in internal control over financial reporting remained. A remediation plan is underway, but management says the weakness will not be considered remediated until controls operate effectively and are tested.
- Legal matters include an adverse Belgian court ruling restricting distribution of the METRO model there, with potential penalties capped at €1.0 million for CAE; the company says it intends to appeal and has accrued the related liability. Other matters include a $19 million stock-option lawsuit, supplier disputes and arbitration, and a receivable claim of about $1.13 million. The filing says aggregate litigation is not believed to have a material adverse impact, while noting outcomes are uncertain.
- Customer and supplier concentration warrant attention: one customer represented 16% of nine-month revenue, and two suppliers represented 40% of purchases. Warrants and convertible-note terms may create redemption obligations or dilution. Broader risks include execution, funding needs, supply constraints, EV competition, and foreign-exchange exposure.
Important facts for investors to verify
- Whether vehicle growth and improved gross margins persist, and whether revenue growth converts into lower operating losses and cash burn.
- Cash runway and actual liquidity needs relative to management’s 12-month sufficiency assessment, including facility expansion and lease commitments.
- Status, maturity, redemption or conversion terms of the remaining convertible notes and potential dilution from warrants.
- Progress and independent testing of internal-control remediation.
- Developments in the Belgian METRO restriction and other material litigation, including any changes to accrued liabilities.
- Inventory turnover and recoverability, customer collections, and continued reliance on concentrated customers and suppliers.