You should read the following discussion and analysis in conjunction with our financial statements and the related notes appearing elsewhere in this annual report on Form 10-K. This discussion may contain forward-looking statements based on current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under "Item 1A.- Risk Factors" or in other parts of this annual report on Form 10-K. 63 A. Operating Results 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. In 2018, we engaged in the sale of bitcoin mining equipment, providing hosting services to mine bitcoins and in 2019, we sold alfafa hay from the United Statesto China. In 2020 and 2021, no revenue was generated from the cryptocurrency mining services and alfafa hay sales. Our liquidity position has deteriorated since 2015. We suffered net losses of $15.1 million, $6.3 millionand $44.8 millionfor the years ended December 31, 2019, 2020 and 2021, respectively. We also had an accumulated deficit of $637.4 millionand a working capital deficit of $90.0 millionas of December 31, 2021. For a detailed discussion, please see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations -B. Liquidity and Capital Resources-Capital Resources and Material Known Facts on Liquidity." Our operating results for future periods are subject to numerous uncertainties and it is uncertain if we will be able to reduce or eliminate our net losses for the foreseeable future. We have developed a plan to continue implementing various measures to boost revenue and control the cost and expenses within an acceptable level. Such measures include: 1) negotiate with potential buyers to sell certain PV solar projects; 2) negotiate with convertible bond holder for postpone of repayments; 3) improve the profitability of the business in US; 4) obtain equity financing from initial public offerings of certain subsidiaries; 5) strictly control and reduce business, marketing and advertising expenses and 6) seek for certain credit facilities While we believe that the measures in the plans will be adequate to allow us to meet our liquidity and cash flow requirements within one year after the date that the consolidated financial statements are issued, there is no assurance that the plans will be successfully implemented. If we fail to achieve these goals, we may need additional financing to repay debt obligations and execute our business plan, and we may not be able to obtain the necessary additional capital on a timely basis, on acceptable terms, or at all. In the event that financing sources are not available, or that the we are unsuccessful in increasing our gross profit margin and reducing operating losses, we may be unable to implement our current plans for expansion, repay debt obligations or respond to competitive pressures, any of which would have a material adverse effect on our business, financial condition and results of operations and may materially adversely affect our ability to continue as a going concern.
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. 64 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 PV 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.
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. 65 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.
Selected Income Statement Items
Our revenue for the years ended
December 31, 2019, 2020 and 2021 was mainly derived from sales of PV components, roofing and solar energy systems installation, electricity revenue with Power Purchase Agreements ("PPAs"), sales of PV project assets, sales of pre-development solar projects, sales and leasing of EVs and others. 66
The following table shows the breakdown of our revenue from continuing operations by business category for the periods indicated:
For the years ended December 31, 2019 2020 2021 ($ in thousands except percentage) Sales of PV components
$ 80,94182.7% $ 112,44281.1% $ 123,13876.0% Roofing and solar systems installation - - - - 29,028 17.9% Sales of pre-development solar project (2,835 ) (2.9 )% 101 0.1% 894 0.6% Sales of PV project assets 9,563 9.8% 19,901 14.4% - 0% Electricity revenue with PPAs 3,368 3.4% 4,421 3.2% 4,587 2.8% Others 6,846 7.0% 1,763 1.2% 4,346 2.7% $ 97,883100% $ 138,628100.0% $ 161,993100.0% Cost of Revenues
Our cost of revenues consist primarily of raw materials and labor cost. In the years ended
December 31, 2019, 2020 and 2021, we had cost of revenues of $90.7 million, $121.8 millionand $151.4 millionfrom our operation, respectively. Operating Expenses
In the years ended
December 31, 2019, 2020 and 2021, our operating expenses consisted of (1) general and administrative expenses, (2) sales, marketing and customer service expenses, (3) provision for credit losses and (4) impairment charges. General and administrative expenses. Our general and administrative expenses primarily consist of salaries and share based compensation expense, professional service fees, rental and office supplies expenses. In the years ended December 31, 2019, 2020 and 2021, our general and administrative expenses were $15.2 million, $13.5 millionand $41.8 million, respectively. Sales, marketing and customer service expenses. Our sales, marketing and customer service expenses consist primarily of advertising expense, amortization of intangible assets and salaries. In the years ended December 31, 2019, 2020 and 2021, our sales, marketing and customer service expenses were $2.4 million, $2.2 millionand $7.6 million, respectively.
Provision for credit loss. In the year ended
Depreciation charges. Our impairment charges consist of impairment charges of project assets, intangible assets, property, plant and equipment, etc.
Other Income (Expense) In the year ended
December 31, 2019, our other income (expense) includes interest expense, net, change in fair value of derivative liability, reversal of tax penalty, net foreign exchange gain and others. In the year ended December 31, 2020, our other income (expense) includes interest expense, net, change in fair value of derivative liability, net foreign exchange loss and others, gain on de-recognition of long aged liabilities and gain on forgiveness of PPP loan. In the year ended December 31, 2021, our other income (expense) includes interest expenses, net, net foreign exchange gain, gain on forgiveness of PPP loan, change in fair value of derivative liability and others.
Interest charges. Our interest expense arises from borrowings. In the past years
67 Reversal of tax penalty. On
May 27, 2019and February 20, 2020, the Internal Revenue Service (IRS) issued notices which assessed penalties for Federal income tax for the tax years ended December 31, 2017and 2016 in the amount of $1.2 millionand $1.3 millionplus an immaterial amount of interest, respectively. The state portion of tax penalty is re-estimated in the amount of $0.3 million. Thus, we reversed $6.9 millionof tax penalty for the year ended December 31, 2019. On September 6, 2021we received another notice from IRSwhich assessed penalties for Federal income tax for the tax years ended December 31, 2017in the amount of $1,193plus interest. We assessed it as a substation for the original letter received in 2019 as they were for the same period with same principle penalty amount with different addressee, which changed from SPI Solar Inc., a subsidiary of the Group to SPI Energy Co. Ltdand Subsidiaries, thus no additional provision of penalty was made. As of the issuance date of the consolidated financial statements, we have not received the result of the tax penalty from IRS. Income Tax
The following table sets forth our loss before income taxes for the relevant geographic locations for the periods indicated:
For the year ended December 31, 2019 2020 2021 United States (4,926 )
$ (7,525 ) $ (45,860 )Foreign (10,130 ) 1,718 2,480 Total (15,056 ) $ (5,807 ) $ (43,380 )Cayman Islands We are incorporated in the Cayman Islands. Under the current laws of the Cayman Islands, we are not subject to income or capital gains tax in the Cayman Islands. Payments of dividends and capital in respect of our Shares will not be subject to taxation in the Cayman Islandsand no withholding will be required on the payment of a dividend or capital to any holder of our Shares, nor will gains derived from the disposal of our Shares be subject to Cayman Islandsincome or corporation tax. The Cayman Islandscurrently have no income, corporation or capital gains tax and no estate duty, inheritance tax or gift tax. United States
Financial Accounting Standards Board("FASB") staff Q&A Topic 740, No. 5, Accounting for Global Intangible Low-Taxed Income (GILTI), the FASB staff noted that the Company must make an accounting policy election to either (1) recognize taxes due on future U.S.inclusions in taxable income related to GILTI as a current-period expense when incurred (the "period cost method") or (2) factor such amount into the Company's measure of its deferred taxes (the "deferred method"). The Company elected to treat GILTI as a current-period expense when incurred. The Company has not recognized GILTI expense for the year ended December 31, 2021as there were either no earnings from controlled foreign corporations or the "high-tax" exclusion applied. Hong Kong
According to Tax (Amendment) (No. 3) Ordinance 2018 published by
Hong Konggovernment, form April 1, 2018, under the two-tiered profits tax rates regime, the profits tax rate for the first HKD2 millionof assessable profits will be lowered to 8.25% (half of the rate specified in Schedule 8 to the Inland Revenue Ordinance (IRO)) for corporations. No provision for Hong Kongtax has been made in our consolidated financial statements, as our Hong Kongsubsidiary had not generated any assessable income for the years ended December 31, 2019, 2020 and 2021. Our subsidiaries incorporated in Hong Kongwere exempted from the Hong Kongincome tax on its foreign-derived income and there were no withholding taxes in Hong Kongon the remittance of dividends.
See “Heading 1. Business – Taxation” for more information.
Significant Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in
the United States of America, which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements, the reported amounts of revenues and expenses during the reporting periods and the related disclosures in the consolidated financial statements and accompanying footnotes. Out of our significant accounting policies, which are described in Note 3-Summary of Significant Accounting Policies of our consolidated financial statements included elsewhere in this Form 10-K, 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. Revenue Recognition Our accounting practices under Accounting Standards Codification ("ASC") No. 606, "Revenue from Contracts with Customers" ("ASC 606" or "Topic 606") are
We generate revenue from sales of PV components, roofing and solar systems installation, electricity revenue with Power Purchase Agreements ("PPAs"), sales of PV project assets, sales of pre-development solar projects, sales and leasing of EVs and others.
Sale of PV components. Revenue on sale of PV components is recognized at a point in time following the transfer of control of such products to the customer, which typically occurs upon shipment or acceptance of the customer depending on the terms of the underlying contracts. Roofing and solar systems installation. Revenue from roofing and solar energy system installation is recognized over time. For solar system our principal performance obligation is to design and install a customize solar energy system, sometimes, reinstall the customer's existing solar energy system that is interconnected to the local power grid and for which permission to operate has been granted by a utility company to the customer. For roofing our principal performance obligation is to design and build roof system per customer selection. All costs to obtain and fulfill contracts associated with system sales and other product sales are expensed to cost of revenue when the corresponding revenue is recognized. We recognize revenue using a cost-based input method that recognizes revenue and gross profit as work is performed based on the relationship between actual costs incurred compared to the total estimated cost of the contract. In applying cost-based input method, we use the actual costs incurred to the total estimated cost, to determine the progress towards contract completion and to calculate the corresponding amount of revenue and gross profit to recognize. Electricity revenue with PPAs. We sell energy generated by PV solar power systems under PPAs. For energy sold under PPAs, we recognize revenue each period based on the volume of energy delivered to the customer (i.e., the PPAs off-taker) and the price stated in the PPAs. We have determined that none of the PPAs contains a lease since (i) the purchaser does not have the rights to operate the PV solar power systems, (ii) the purchaser does not have the rights to control physical access to the PV solar power systems, and (iii) the price that the purchaser pays is at a fixed price per unit of output. Sale of PV project asset. Our sales arrangements for PV projects do not contain any forms of continuing involvement that may affect the revenue or profit recognition of the transactions, nor any variable considerations for energy performance guarantees, minimum electricity end subscription commitments. The Company therefore determined its single performance obligation to the customer is the sale of a completed solar project. We recognize revenue for sales of solar projects at a point in time after the solar project has been grid connected and the customer obtains control of the solar project. Sales of pre-development solar projects. For sales of pre-development solar projects in which we transfer 100% of the membership interest in solar projects to a customer, we recognize all of the revenue for the consideration received at a point in time when the membership interest was transferred to the customer, which typically occurs when we delivered the membership interest assignment agreement to the customer. The contract arrangements may contain provisions that can either increase or decrease the transaction price. These variable amounts generally are resolved upon achievement of certain performance or upon occurrence of certain price reduction conditions. Variable consideration is estimated at each measurement date at its most likely amount to the extent that it is probable that a significant reversal of cumulative revenue recognized will not occur and true-ups are applied prospectively as such estimates change. Changes in estimates for sales of pre-development solar projects occur for a variety of reasons, including but not limited to (i) EPC construction plan accelerations or delays, (ii) product cost forecast changes, (iii) change orders, or (iv) occurrence of purchase price reduction conditions. The cumulative effect of revisions to transaction prices are recorded in the period in which the revisions to estimates are identified and the amounts can be reasonably estimated. 69
Revenue from sales and leasing of EV. We recognize revenue from sales of EV at a point in time following the transfer of control of such products to the customer, which typically occurs upon the delivery to the customer for EV sales. We determined that the government grants related to sales of EV should be considered as part of the transaction price because it is granted to the EV buyer and the buyer remains liable for such amount in the event the grants were not received by us or returned due to the buyer violates the government grant terms and conditions. EV leasing revenue includes revenue recognized under lease accounting guidance for direct leasing programs. We account for these leasing transactions as operating leases under ASC 840 Leases, and revenues are recognized on a straight-line basis over the contractual term. Other revenue. Other revenue mainly consists of revenue generated from bitcoin mining equipment sales and hosting service, sales of component and charging stations, sale of Alfalfa hay, engineering and maintenance service, shipping and delivery service and other. Revenue on sales of bitcoin mining equipment, alfalfa hays and component and charging stations were recognized at a point in time following the transfer of control of such products to the customer, which typically occurs upon acceptance of the products made by the customer, and upon delivery of the products to the hosting site or receipt place assigned by the customer, installed and set up the products for sale of bitcoin mining equipment. Revenue for hosting service, engineering and maintenance service and shipping and delivery service are recognized on a straight-line basis over time as services are performed and based on the output method related to the time incurred during the service period.
Impairment of long-lived assets
Our long-lived assets include property, plant and equipment, project assets and other intangible assets with finite lives. We evaluate long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset or asset group be tested for possible impairment, we first compare undiscounted cash flows expected to be generated by that asset or asset group to its carrying amount. If the carrying amount of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying amount exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary. Estimating future cash flows requires significant judgment, and such projections may vary from the cash flows eventually realized. Any impairment write-downs would be treated as permanent reductions in the carrying amounts of the assets and a charge to operations would be recognized. We review project assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. We consider a project commercially viable or recoverable if it is anticipated to be sold for a profit once it is either fully developed or fully constructed. We consider a partially developed or partially constructed project commercially viable or recoverable if the anticipated selling price is higher than the carrying value of the related project assets. We examine a number of factors to determine if the project is expected to be recoverable, including whether there are any changes in environmental, permitting, market pricing, regulatory, or other conditions that may impact the project. Such changes could cause the costs of the project to increase or the selling price of the project to decrease. If a project is not considered recoverable, we impair the respective project assets and adjust the carrying value to the estimated fair value. The judgments and estimates involved in identifying and quantifying the impairment of long-lived assets involve inherent uncertainties, and the measurement of the fair value is dependent on the accuracy of the assumptions used in making the estimates and how those estimates compare to our future operating performance. We evaluate long-lived assets for impairment and did not note events or changes in circumstances that indicate the carrying amount of the asset groups may not be recovered as of
December 31, 2020and 2021. Inventories Inventories are stated at the lower of cost or net realizable value. The cost of raw materials is determined on the basis of weighted average cost method. The cost of finished goods is determined on the basis of weighted average and comprises direct materials, direct labor and an appropriate proportion of overhead. Net realizable value is based on estimated selling prices less selling expenses and any further costs expected to be incurred for completion. Adjustments to reduce the cost of inventory to net realizable value are made, if required, for estimated excess, obsolescence, or impaired balances if any. We evaluate the recoverability of our inventories based on assumptions about expected demand and market conditions. Our assumption of expected demand is developed based on our analysis of sales backlog, market forecast, and competitive intelligence. Our assumption of expected demand is compared to available inventory, production capacity, available third-party inventory,
and growth plans.
Over the years ended
70 Share-Based Compensation Our share-based payment transactions with employees, such as restricted shares and share options, are measured based on the grant-date fair value of the equity instrument issued. The fair value of the award is recognized as compensation expense, net of estimated forfeitures, over the period during which an employee is required to provide service in exchange for the award, which is generally the vesting period.
We estimate the fair value of service-based stock options granted using the Black-Scholes option-pricing formula,which requires the use of highly subjective and complex assumptions. If we had made different assumptions, our stock-based compensation expense, net loss and net loss per share of common stock could have been significantly different. See Note 19 to our audited financial statements included elsewhere in this Annual Report for information concerning certain of the specific assumptions we used in applying the Black-Scholes option pricing model to determine the estimated fair value of our stock options granted during the year ended
December 31, 2019, 2020 and 2021.
Accounts receivable and allowance for credit losses
We grant open credit terms to credit-worthy customers. Accounts receivable are primarily related to our sales of pre-development solar projects, sales of PV components, revenue from roofing and solar energy systems installation, electricity revenue with PPA, and sales of EVs. We maintain allowances for credit losses for estimated losses resulting from the inability of our customers to make required payments. Accounts receivable is considered past due based on its contractual terms. In establishing the allowance, management considers historical losses, the financial condition, the accounts receivables aging, the payment patterns and the forecasted information in pooling basis upon the use of the Current Expected Credit Loss Model ("CECL Model") in accordance with ASC topic 326, Financial Instruments - Credit Losses. Accounts receivable that are deemed to be uncollectible are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. There is a time lag between when the Company estimates a portion of or the entire account balances to be uncollectible and when a write off of the account balances is taken. We take a write off of the account balances when we can demonstrate all means of collection on the outstanding balances have been exhausted. We do not have any off-balance-sheet credit exposure related to our customers. Contractually, we may charge interest for extended payment terms and require collateral.
The provision for credit losses is
Goodwillrepresents the excess of the purchase consideration over the fair value of the identifiable tangible and intangible assets acquired and liabilities assumed of the acquired entity as a result of our acquisitions of interests in our subsidiaries. Goodwillis not amortized but is tested for impairment on an annual basis, or more frequently if events or changes in circumstances indicate that it might be impaired. We have an option to first assess qualitative factors to determine whether it is necessary to perform the quantitative goodwill impairment test. In the qualitative assessment, we consider primary factors such as industry and market considerations, overall financial performance of the reporting unit, and other specific information related to the operations. Based on the qualitative assessment, if it is more likely than not that the fair value of each reporting unit is less than the carrying amount, the quantitative impairment test is performed. In performing the quantitative impairment test, we compare the fair values of each reporting unit to its carrying amount, including goodwill. If the fair value of each reporting unit exceeds its carrying amount, goodwill is not considered to be impaired. If the carrying amount of a reporting unit exceeds its fair value, we recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value; the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Application of a goodwill impairment test requires significant management judgment, including the identification of reporting units, assigning assets, liabilities and goodwill to reporting units, and determining the fair value of each reporting unit. The judgment in estimating the fair value of reporting units includes estimating future cash flows, determining appropriate discount rates and making other assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value for each reporting unit.
We performed a goodwill impairment test at
71 Income Taxes
We account for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recognized if it is more likely than not that some portion, or all, of a deferred tax asset will not be realized. We recognize in the consolidated financial statements the impact of a tax position, if that position is more likely than not of being sustained upon examination, based on the technical merits of the position. In evaluating whether a tax position has met the more-likely-than-not recognition threshold, management presumes that the position will be examined by the appropriate taxing authority that has full knowledge of all relevant information. In addition, a tax position that meets the more-likely-than-not recognition threshold is measured to determine the amount of benefit to be recognized in the financial statements. The tax position is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon settlement. Our tax liability associated with unrecognized tax benefits is adjusted periodically due to changing circumstances, such as the progress of the tax audits, case law developments and new or emerging legislation. Such adjustments are recognized entirely in the period in which they are identified. We record interest and penalties related to an uncertain tax position, if and when required, as part of income tax expense in the consolidated statements of operations. No reserve for uncertainty tax position was recorded by us for the years ended
December 31, 2020and 2021. We do not expect that the assessment regarding unrecognized tax positions will materially change over the next 12 months. We are not currently under examination by an income tax authority, nor has been notified that an examination is contemplated.
Recent accounting pronouncements
Recently Adopted Accounting Standards
December 2019, the FASB issued ASU No. 2019-12, Income taxes (Topic 740), Simplifying the Accounting for Income Taxes. This guidance amends ASC Topic 740 and addresses several aspects including 1) evaluation of step-up tax basis of goodwill when there is not a business combination, 2) policy election to not allocate consolidated taxes on a separate entity basis to entities not subject to income tax, 3) accounting for tax law changes or rates during interim periods, 4) ownership changes from equity method investment to subsidiary or vice versa, 5) elimination of exception to intraperiod allocation when there is gain in discontinued operations and a loss from continuing operations, 6) treatment of franchise taxes that are partially based on income. The standard is effective for interim and annual periods beginning after December 15, 2020. We adopted this ASU from January 1, 2021. The adoption of ASU No. 2019-12 did not have a material impact on the our consolidated financial statements. In January 2017, the FASB issued ASU 2017-04, Intangibles (Topic 350): Goodwilland Other. This ASU simplifies the accounting for goodwill impairment and removes Step 2 of the goodwill impairment test. Goodwillimpairment will be the amount by which a reporting unit's carrying value exceeds its fair value limited to the total amount of goodwill allocated to that reporting unit. Entities will continue to have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary. The ASU is effective for interim and annual periods beginning after December 15, 2021, with early adoption permitted. We adopted this ASU from January 1, 2021, and the adoption did not have a material impact on our consolidated financial statements and related disclosures. In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments, which amends the current accounting guidance and requires the measurement of all expected losses based on historical experience, current conditions and reasonable and supportable forecasts. For trade receivables, loans, and other financial instruments, We will be required to use a forward-looking expected loss model that reflects losses that are probable rather than the incurred loss model for recognizing credit losses. The standard became effective for interim and annual periods beginning after December 15, 2019. Application of the amendments is through a cumulative- effect adjustment to retained earnings as of the effective date. The adoption did not have a material impact on our consolidated financial statements. 72 In November 2021, The FASB issued ASU No. 2021-10, Government Assistance (Topic 832), Disclosures by Business Entities about Government Assistance. This guidance requires business entities to make annual disclosures about transactions with a government (including government assistance) they account for by analogizing to a grant or contribution accounting model (e.g., IAS 20, Accounting for Government Grants and Disclosure of Government Assistance). The required disclosures include the nature of the transaction, the entity's related accounting policy, the financial statement line items affected and the amounts reflected in the current period financial statements, as well as any significant terms and conditions. An entity that omits any of this information because it is legally prohibited from being disclosed needs to include a statement to that effect. The guidance is effective for financial statements issued for annual periods beginning after December, 15 2021, and early adoption is permitted. We adopted this ASU from January 1, 2022and the adoption did not have a material impact on our consolidated financial statements.
We do not believe that other recently issued but not yet effective accounting standards, if currently adopted, would have a material impact on the consolidated financial position, statements of earnings and cash flows.
Recent Financing Activities
October 2020, the Company offered and sold 2,964,000 ordinary shares in a registered direct offering to institutional investors at a purchase price of $5.40per share for proceeds of approximately $14.6 million, after deducting the placement agent's fees and other expenses. In December 2020, the Company offered and sold 3,495,000 ordinary shares and warrants to purchase an aggregate of 3,495,000 ordinary shares in a registered direct offering to institutional investors at a purchase price of $10.02per share and accompany warrant for proceeds of approximately $32.3 million, after deducting the placement agent's fees and other expenses. The warrants are exercisable for a period of five years from December 7, 2020at an exercise price $10.50per share. In November 2020, the Company sold a Convertible Promissory Note for a total consideration of approximately $2.1 million, convertible into ordinary shares of the Company at a conversion price of $26.00per share. The Convertible Promissory Note was offered and sold solely to the Investor in a private placement in reliance on Regulation D promulgated under the U.S. Securities
Act of 1933, as amended.
February 2021, the Company offered and sold 1,365,375 ordinary shares in a registered direct offering to certain institutional investors at a purchase price of $10.79per ordinary share for $13.6 million, net of direct offering cost of $1.1 million.
February 2021, June 2021, September 2021and November 2021, the Company sold Convertible Promissory Notes to an investor for consideration of approximately $4.21 millioneach and $16.84 millionin total, convertible into ordinary shares of the Company at a conversion price of $20.00per share. The Convertible Promissory Notes were offered and sold solely to the investor in a private placement in reliance on Regulation D promulgated under the U.S. Securities
Act of 1933, as amended. 73 Results of Operations The following table sets forth a summary, for the periods indicated, of our consolidated results of operations 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. December 31, 2019 2020 2021 Net sales 97,883 100 %
$ 138,628100 % $ 161,993100.0 % Cost of revenues 90,693 92.7 % 121,773 87.8 % 151,373 93.4 % Gross profit 7,190 7.3 % 16,855 12.2 % 10,620 6.6 % Operating expenses:
General and administrative 15,158 15.5 % 13,485 9.7 % 41,780 25.8 % Sales, marketing and customer service 2,398 2.4 % 2,185 1.6 % 7,581 4.7 % Provision for credit losses 4,115 4.2 % 1,094
0.8 % 2,735 1.7 % Impairment charges 4,690 4.8 % - -% - -% Total operating expenses 26,361 26.9 % 16,764 12.1 % 52,096 32.2 % Operating (loss) income (19,171 ) (19.6 )% 91 0.1 % (41,476 ) (25.6 )% Other income (expense): Interest expenses (3,768 ) (3.8 )% (3,790 ) (2.7 )% (5,137 ) (3.2 )% Change in fair value of derivative liability 285 0.3 % 496 0.4 % 67 0.0 % Net foreign exchange gain (loss) 1,261 1.3 % (5,411 ) (3.9 )% 2,694 1.7 % Reversal of tax penalty 6,890 7.0 % - -% - -% Others (553 ) (0.6 )% 2,807 2.0 % 472 0.3 % Total other income (expense), net 4,115 4.2 % (5,898 ) (4.2 )% (1,904 ) (1.2 )% Loss before income taxes (15,056 ) (15.4 )% (5,807 ) (4.1 )% (43,380 ) (26.8 )% Income taxes expense 92 0.1 % 458 0.3 % 1,454 0.9 % Net loss
$ (15,148 )(15.5 )% $ (6,265 )(4.4 )% $ (44,834 )(27.7 )%
Comparison of the year ended
Net sales - Net sales were
$138.6 millionand $162.0 millionfor the years ended December 31, 2020and 2021, respectively, representing an increase of $23.4 millionor 16.9%. The increase in net sales for the year ended December 31, 2021over the comparative period was primarily due to revenue increase from sales of PV components of $10.7 million, revenue increase from roofing and solar systems installation of $29.0 millionand partially net off by the decrease of revenue from the sale of PV projects of $19.9 million. Cost of revenues - Cost of revenues was $121.8 million(87.8% of net sales) and $151.4 million(93.4% of net sales) for the years ended December 31, 2020and 2021, respectively, representing an increase of $29.6 millionor 24.3%. The increase in cost of goods sold was in consistent with the increase of net sales. Gross profit - Our gross profit decreased from $16.9 millionin the year ended December 31, 2020to $10.6 millionin the year ended December 31, 2021. Gross margins were 12.2% and 6.6% for the years ended December 31, 2020and 2021, respectively. The decrease in gross margin was primarily due to new business of roofing and solar systems installation with a negative gross margin due to inefficient operation at the beginning of the business. 74 General and administrative expenses - General and administrative expenses were $13.5 million(9.7% of net sale) and $41.8 million(25.8% of net sale) for the years ended December 31, 2020and 2021, respectively, representing an increase of $28.3 million, or 209.6%. The increase was mainly due to the business of zero-emission EVs in U.S.started from Oct 2020and roofing and solar energy systems installation business in U.S.from February 2021. Sales, marketing and customer service expenses - Sales, marketing and customer service expenses were $2.2 million(1.6% of net sales) and $7.6 million(4.7% of net sales) for the years ended December 31, 2020and 2021, respectively, representing an increase of $5.4 million, or 245.5%. The increase in our sales, marketing and customer service expenses was mainly due to the increase of employees' salaries and the amortization of the cost of customer list and work in process contracts purchased from the PDI. Provision for credit loss - In 2020 and 2021, we accrued credit loss provision of $1.1 millionand $2.7 million, respectively. The increase was mainly due to the provision for the accounts receivable generated from the new business of sales of roofing and solar energy systems installation. Interest expense, net - Interest expense net was $3.8 million(2.7% of net sales) and $5.1 million(3.2% of net sales) for the years ended December 31, 2020and 2021, respectively, representing an increase of $1.3 million, or 35.5%. The increase was mainly due to the increase of our convertible bonds and borrowings.
Net foreign exchange gain (loss) – We recorded a net foreign exchange loss of
(1.7% of net sales) for the years ended
Other income or expenses - We generated other income of
$2.8 million(2.0% of net sales) and $0.5 million(0.3% of net sales) in the years ended December 31, 2020and 2021. The other income in 2020 mainly represents the derecognition of long age liabilities of $2.3 million. Income tax expense -We had a provision for income taxes of $0.5 million(0.3% of net sales) and $1.5 million(0.9% of net sales) for the years ended December 31, 2020and 2021, respectively, representing an increase of $1.0 million, or 200.0%. The increase was mainly due to the increase in profit before tax of
our subsidiary in
Australia. Net loss - For the foregoing reasons, we incurred a net loss of $44.8 million(27.7% of net sales) for the year ended December 31, 2021, representing an increase of net loss of $38.5 millioncompared to a net loss of $6.3 million(4.4% of net sales) for the year ended December 31, 2020. B. Liquidity and Capital Resources
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.
We have recurring losses from operations. We have incurred a net loss of
$44.8 millionduring the year ended December 31, 2021. As of December 31, 2021, we had a working capital deficit of $90.0 millionand the cash flow used in the operation activities for the year ended December 31, 2021was $27.5 million. These conditions raise substantial doubt about the Company's ability to continue as a going concern. For the next 12 months from the issuance date of this report, we plan to continue implementing various measures to boost revenue and control the cost and expenses within an acceptable level. Such measures include: 1) negotiate with potential buyers to sell certain PV solar projects; 2) negotiate with convertible bond holder for postpone of repayments; 3) improve the profitability of the business in US; 4) obtain equity financing from initial public offerings of certain subsidiaries; 5) strictly control and reduce business, marketing and advertising expenses and 6) seek for certain credit facilities. 75 While management believes that the measures in the plans will be adequate to allow us to meet our liquidity and cash flow requirements within one year after the date that the consolidated financial statements are issued, there is no assurance that the plans will be successfully implemented. If we fail to achieve these goals, we may need additional financing to repay debt obligations and execute our business plan, and we may not be able to obtain the necessary additional capital on a timely basis, on acceptable terms, or at all. In the event that financing sources are not available, or that we are unsuccessful in increasing our gross profit margin and reducing operating losses, we may be unable to implement our current plans for expansion, repay debt obligations or respond to competitive pressures, any of which would have a material adverse effect on our business, financial condition and results of operations and may materially adversely affect our ability to continue as a going concern. The consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded assets or the amounts and classification of liabilities or any other adjustments that might be necessary should we be unable to continue as a going concern. A summary of the sources and uses of cash and cash equivalents is as follows: For the year ended December 31, 2019 2020 2021 Net cash used in operating activities $ (2,871 ) $ (5,650 ) $ (27,484 )Net cash (used in) generated from investing activities (7,894 ) 1,385 (8,866 ) Net cash generated from financing activities 9,520 40,794 18,425 Effect of exchange rate changes on cash (351 ) 250 (4,012 ) Net (decrease) increase in cash, cash equivalents and restricted cash $ (1,596 ) $ 36,779 $ (21,937 )Operating Activities
Net cash used in operating activities was
$27.5 millionfor the year ended December 31, 2021, primarily as a result of (i) net loss of $44.8 million, (ii) increase in project assets of $6.0 million, (iii) increase in inventories of $7.1 million, and (iv) increase in prepaid expenses and other assets of $4.6 million; the decrease was partially offset by (i) increase in accounts payable of $8.5 million, (ii)increase in advance from customers of $3.6 million, (iii) increase in accrued liabilities and other liabilities of $4.0 million, and noncash adjustments mainly including (iv) depreciation and amortization of $7.3 million, (v) Provision for credit loss of $2.7 million, (vi) stock-based compensation expenses of $5.8 million. Net cash used in operating activities was $5.7 millionfor the year ended December 31, 2020, primarily as a result of (i) net loss of $6.3 million, (ii) change in accounts payable of $7.0 million, and (iii) change in advances from customers of $17.6 million, (iv) reversal of warranty reserve of $1.5 million, (v) gain on de-recognition of long-aged liabilities of $2.3 million; the decrease was partially offset by (i) provision for prepaid and other current assets of $1.1 million, (ii) change in project assets of $14.7 million, and (iii) change in accrued liabilities and other liabilities of $9.7 million. Net cash used in operating activities was $2.9 millionfor the year ended December 31, 2019, primarily as a result of (i) net loss of $15.1 million, (ii) change in tax penalty of $6.9 million, and (iii) change in advance from customers of $8.4 million, and (iv) change in inventories of $2.0 million; the decrease was partially offset by (i) change in accounts payable of $7.8 million,(ii) Provision for prepaid and other current assets of $ 4.1 million, (iii) change in notes receivable of $4.8 million, (iv) change in project assets of $3.3 million, and (v) change in accounts receivable of $3.1 million. Investing Activities Net cash used in investing activities was $8.9 millionfor the year ended December 31, 2021, primarily as a result of the cash paid for asset purchase of PDI in the amount of $8.0 millionand purchase of property, plant and equipment of $1.3 million, partially offset by proceeds from disposal of property and
$0.5 million. 76
Net cash generated by investing activities was
Net cash used in investing activities was
$7.9 millionfor the year ended December 31, 2019, primarily as a result of the acquisition of PV station in Greeceof $8.3 millionand acquisitions of property, plant and equipment of $4.8 million, partially offset by proceeds from sale of cryptocurrencies of $3.6 millionand proceeds from disposal of affiliated entities of $4.5 million.
Net cash generated from financing activities was
$18.4 millionfor the year ended December 31, 2021, primarily consisted of (i) proceeds from issuance of ordinary shares of $13.6 million, (ii) proceeds from issuance of convertible note of $16.0 million, (iii) net proceeds from line of credit and loans payable of $1.6 millionand (iv) proceeds from exercise of options issued to Lighting Charm Limitedduring disposition of SPI China of $1.1 million, partially offset by repayment of convertible notes of $13.9 million. Net cash generated from financing activities was $40.8 millionfor the year ended December 31, 2020, primarily consisted of (i) proceeds from issuance of ordinary shares of $46.8 million, (ii) proceeds from issuance of convertible note of $2.0 million, partially offset by (i) repayment of convertible notes of $7.6 millionand (ii) net repayment of line of credit and loans payable of
Net cash generated from financing activities was
$9.5 millionfor the year ended December 31, 2019, primarily the result of proceeds from issuance of ordinary shares of $7.7 millionand proceeds from issuance of convertible bond of $1.3 million. Capital Expenditures We incurred capital expenditures of $4.8 million, $0.2 millionand $9.3 millionin 2019, 2020 and 2021, respectively. Capital commitments amounted to approximately $2.0 millionas of December 31, 2021. These capital commitments will be used primarily for the construction of our solar projects. 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 annual report, we are not aware of any trends, uncertainties, demands, commitments or events for 2021 that 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
We have not entered into any financial guarantees or other commitments to guarantee the payment obligations of any third parties. 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 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. 77
Tabular disclosure of contractual obligations
The following table sets forth our contractual obligations as of
December 31, 2021: Payment due by period less than more than 5
Contractual Obligations Total 1 year 1-3 years 3-5 years years ($ in thousands) Convertible bonds
$ 49,040 $ 49,040$ - $ - $ - Short-term borrowings 8,788 8,788 - - -
Long-term debt obligations 13,132 332 881 6,173 5,746 Operating lease obligations 21,628 2,305 4,381
4,440 10,502 Capital commitment 1,992 1,992 - - - Due to an affiliate 61,219 61,219 - - - Total
$ 155,799 $ 123,676 $ 5,262 $ 10,613 $ 16,248
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