Thunder Power Holdings, Inc. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations You should read the following discussion and analysis of our financial condition and results of operations together with our condensed consolidated financial statements and the related notes and other financial information included elsewhere in this Annual Report on Form 10-K. As discussed in the section titled “Note Regarding Forward-Looking Statements,” the following discussion and analysis contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those identified below and those discussed in the section titled “Risk Factors”. Overview Our mission is to power the future of sustainable transportation by creating stylish, innovative and cost-efficient premium electric vehicles centered around differentiated designs and solutions tailored for every lifestyle. We are a technology innovator and a developer of premium electric vehicles (“EVs”). We have developed several proprietary technologies which are the building blocks of the Thunder Power family of EVs. We focus on the development and manufacturing of premium EVs with differentiated designs and solutions for every lifestyle. Four models are currently featured in our phased development and roll-out strategy: the limited-edition coupe, (the “Coupe” or “488”), long-range Sedan (the “Sedan”), compact city car (the “City Car” or “Chloe”) and the long-range SUV (the “SUV”, and together with the Coupe, Sedan, and City Car, the “Models”). We intend to target not just consumers who desire EVs, but consumers who desire practical and innovative EVs, as well as consumers who seek a luxury experience. We believe that by leveraging our modular integration concept starting with the modularized chassis system patented by us, we are creating a family of EVs (excluding the City Car) which share common parts and modules which we believe requires lower investment and reduced design and production time as opposed to those of traditional automotive manufacturers. We intend to first create the initial design for our Sedan, and then scale upwards to create the Coupe and scale downward to create the City Car. In time, we expect to round off our offering with the SUV. We expect to offer to the market eco-friendly, premium EVs positioned to earn market share based on design, quality, comfort, range, and price. Among other advantages, we believe that our proprietary technologies will significantly increase the driving range for our EVs while allowing for faster recharging and lower costs of ownership. Business Combination On June 21, 2024, Feutune Light Acquisition Corporation (“FLFV”) consummated the business combination with Thunder Power Holdings Limited (“TP Holdings”), pursuant to the Merger Agreement (the “Business Combination”). Following the Business Combination, the combined company changed its name to “Thunder Power Holdings, Inc.” (the “Company”), which is organized under the laws of the State of Delaware. Upon consummation of the Business Combination, FLFV acquired all of the issued and outstanding securities of TP Holdings in exchange for (i) 40,000,000 shares of common stock, and (ii) earn out payments consisting of up to an additional 20,000,000 shares of common stock (the “Earnout Shares”) if the Company met certain revenue performance target in the following years through December 31, 2026 (see “ Note 11 – Contingent Consideration ”). Following the consummation of the Business Combination, the combined Company’s common stock began trading on the Nasdaq Global Market (the “Nasdaq”) under the symbol “AIEV” on June 24, 2024. The reverse recapitalization is equivalent to the issuance of securities by TP Holdings for the net monetary assets of FLFV, accompanied by a recapitalization. The Company debited equity for the fair value of the net liabilities of FLFV. In the subsequent financial statements after the Business Combination, the amounts of assets and liabilities for the period before the reverse recapitalization in financial statements, are presented as those of TP Holdings and recognized and measured at their pre-combination carrying amounts. 61 Recent development On December 19, 2024, the Company entered into a Share Exchange Agreement (the “Agreement”) with certain shareholders (the “TW Company Shareholders”) of Electric Power Technology Limited, a Taiwan corporation (“TW Company”). Pursuant to the Agreement, the TW Company Shareholders will exchange 26,079,550 ordinary shares of TW Company for 31,034,666 newly issued shares of the Company’s common stock, par value $0.0001 per share (the “Exchange”). Upon completion of the Exchange, the Company will acquire approximately 30.8% of TW Company’s total issued and outstanding shares. The closing of the Exchange is subject to customary conditions, including receipt of all necessary regulatory approvals and the approval of the Company’s shareholders. The Agreement contains customary representations, warranties and covenants by the parties. The closing must occur no later than October 31, 2025. The Agreement may be terminated: (1) by mutual consent of the parties; (2) by either party upon material breach by the other party that remains uncured for 10 days after notice; (3) if the closing has not occurred within 90 days of signing (subject to extension for regulatory approvals); or (4) by either party if a court or regulatory authority permanently enjoins the transaction. Key Factors Affecting Our Results of Operations We believe that our performance and future success will depend on several Company specific factors, including those key factors discussed below and other factors in the section under the heading “ Risk Factors ” of the registration statement on Form S-4 filed with the Securities and Exchange Commission (the “SEC”) on December 7, 2023, as amended from time to time. Our ability to evaluate our business and future prospects We are an early-stage company with an early stage/limited operating history, operating in a rapidly evolving and highly regulated market. Furthermore, we have not released any commercially available vehicle, and we have no experience manufacturing or selling a commercial product at scale. Because we have not generated revenue from the sale of EVs, and because of the capital-intensive nature of our business, we expect to continue to incur substantial operating losses for the foreseeable future. Our ability to develop different models of vehicles We currently have four models featured in our phased development strategy and our revenue in the foreseeable future will be significantly dependent on a limited number of models. Although we have other vehicle models on our product roadmap, we currently do not expect to introduce another vehicle model until at least 2030. We expect to rely on sales from the Coupe, the Sedan, the City Car, and the SUV, among other sources of financing, for the capital that will be required to develop and commercialize future models. To the extent that production of the models is delayed, reduced or is not well-received by the market for any reason, our revenue and cash flow would be adversely affected, we may need to seek additional financing earlier than we expect, and such financing may not be available to us on commercially reasonable terms, or at all. Our ability to control the substantial costs associated with our operations We will require significant capital to develop and grow our business. We have incurred and expect to continue to incur significant expenses as we build our brand and develop and market our vehicles; expenses relating to developing and manufacturing our vehicles, tooling and expanding our manufacturing facilities; research and development expenses (including expenses related to the development of the current and future products), raw material procurement costs; and general and administrative expenses as we scale our operations. As a company, we do not have historical experience forecasting and budgeting for any of these expenses, and these expenses could be significantly higher than we currently anticipate. In addition, any disruption to our manufacturing operations, obtaining necessary equipment or supplies, expansion of our manufacturing facilities, or the procurement of permits and licenses relating to our expected manufacturing, sales and distribution model could significantly increase our expenses. Our ability to develop a third-party retail product distribution and a full-service network We anticipate utilizing third-party retail product distribution and full-service networks to execute on such plans in all markets. If our use of third-party retail production and full-service networks is not effective, our results of operations and financial conditions could be adversely affected. 62 Key Components of Results of Operations The following section presents the key components of our results of operations by the nature of corresponding operating activities for the periods indicated. You should read this financial information in conjunction with those presented elsewhere in this Annual Report including our financial statements and notes to our financial statements. Revenues We have not generated revenue from the sale of EVs. We expect to generate revenue from the sale of our EV models, the sale and/or licensing of our technologies, and from research and development services. Cost of revenues Although we have no revenue, we have incurred costs associated with trying to generate revenue such as research and development, general and administrative expenses, liquidity and financing expenses and other operating activities as further described below. General and administrative expenses General and administrative expenses primarily consist of personnel salary and welfare expenses and professional and consulting expenses. Over the next several years, we anticipate an increase in our general and administrative expenses with our launch of production lines of our EV cars. Additionally, we expect to incur higher costs related to professional and consulting expenses associated with being a publicly traded company. Taxation The Company is incorporated in the State of Delaware and is required to pay franchise taxes to the State of Delaware on an annual basis. The Company is also registered as a foreign corporation with the State of New Jersey Department of the Treasury. The Company would be subject to income tax under New Jersey state tax laws if it has operations in New Jersey. On August 16, 2022, the Inflation Reduction Act of 2022 (the “IRA”) was signed into federal law. The IRA provides for, among other things, a new U.S. federal 1% excise tax on certain repurchases (including redemptions) of stock by publicly traded domestic (i.e., U.S.) corporations and certain domestic subsidiaries of publicly traded foreign corporations. The excise tax is imposed on the repurchasing corporation itself, not its shareholders from which shares are repurchased. The amount of the excise tax is generally 1% of the fair market value of the shares repurchased at the time of the repurchase. However, for purposes of calculating the excise tax, repurchasing corporations are permitted to net the fair market value of certain new stock issuances against the fair market value of stock repurchases during the same taxable year. In addition, certain exceptions apply to the excise tax. The U.S. Department of the Treasury (the “Treasury”) has been given authority to provide regulations and other guidance to carry out and prevent the abuse or avoidance of the excise tax. The IRA applies only to repurchases that occur after December 31, 2022. Our operating subsidiary Thunder Power New Electric Vehicles (TPNEV) are under the current and applicable laws of BVI and is not subject to tax on income or capital gains. As of December 31, 2024 and 2023, there was no temporary differences and no deferred tax asset or liability recognized. We do not believe that there was any uncertain tax position as of December 31, 2024 and 2023. 63 Results of Operations for the years ended December 31, 2024 and 2023 The following table sets forth a summary of our results of operations for the years ended December 31, 2024 and 2023. This information should be read together with our consolidated financial statements and related notes included elsewhere in this Annual Report. The operating results in any period are not necessarily indicative of the results that may be expected for any future period. For the Year Ended December 31, 2024 2023 Revenues $ — $ — Operating expenses General and administrative expenses (2,502,190 ) (1,815,071 ) Total operating expenses (2,502,190 ) (1,815,071 ) Other income (expenses) Interest income, net 51 — Foreign currency exchange loss (212 ) (573 ) Total other expenses, net (161 ) (573 ) Loss before income taxes (2,502,351 ) (1,815,644 ) Income tax expenses — — Net loss $ (2,502,351 ) $ (1,815,644 ) General and administrative expenses. For the years ended December 31, 2024 and 2023, our general and administrative expenses were approximately $2.5 million and $1.8 million, respectively. The increase in general and administrative expenses was primarily due to an increase of approximately $0.3 million in professional expenses which were incurred to support the closing of business combination, and an increase of share-based compensation of approximately $0.7 million as we issued 90,000 shares of common stock to three independent directors of FLFV at the consummation of the Business Combination, partially offset by a decrease of share-based settlement expenses of approximately $0.5 million. Net loss. As a result of the foregoing, we incurred a net loss of approximately $2.5 million and $1.8 million for the years ended December 31, 2024 and 2023. 64 Liquidity and Capital Resources To date, we have financed our operating activities primarily through cash raised in loans from related parties (see “ Note 9 – Related Party Transactions and Balances ”), and equity financing including private placements. As of September 30, 2024, our cash was $142,616. We have been incurring losses from operations since inception. Accumulated loss amounted to approximately $36.9 million and $34.4 million as of December 31, 2024 and 2023, respectively. Net cash used in operating activities were approximately $1.2 million and $0.7 million for the years ended December 31, 2024 and 2023. As of December 31, 2024, we had a negative working capital of $6.6 million, compared to a working capital of approximately $0.7 million as of December 31, 2023. The working capital excluded the non-cash items, which are prepaid expenses for the certain forward purchase agreement entered into on June 11, 2024, by and among FLFV, the Company and certain investors (the “Forward Purchase Agreement”), deferred offering costs and advance of subscription fees from shareholders. These conditions raised substantial doubts about the Company’s ability to continue as a going concern. Our liquidity is based on our ability to generate cash from operating activities, obtain capital financing from equity interest investors and borrow funds on favorable economic terms to fund our general operations and capital expansion needs. Our ability to continue as a going concern is dependent on management’s ability to successfully execute our business plan, which includes increasing revenue while controlling operating cost and expenses to generate positive operating cash flows and obtaining funds from outside sources of financing to generate positive financing cash flows. Currently, we are working to improve our liquidity and capital sources mainly through borrowing from related parties by obtaining financial support from our principal shareholder who has committed to continue providing funds for our working capital needs whenever needed. In addition, in order to fully implement our business plan and sustain continued growth, we are also actively seeking private equity financing from outside investors. However, there can be no assurance that these plans and arrangements will be sufficient to fund our ongoing capital expenditure, working capital, and other requirements. Cash Flows The following table sets forth a summary of our cash flows for the periods presented: For the Year Ended December 31, 2024 2023 Net cash used in operating activities $ (1,227,253 ) $ (658,729 ) Net cash provided by investing activities 929,302 — Net cash provided by financing activities 153,660   605,250 Net decrease in cash (144,291 ) (53,479 ) Cash at beginning of year 196,907 250,386 Cash at end of year $ 52,616 $ 196,907 Operating Activities Net cash used in operating activities for the years ended December 31, 2024 was approximately $1.2 million, primarily attributable to net loss of approximately $2.5 million, adjusted for non-cash share-based compensation expenses of approximately $1.0 million, an increase of approximately $0.1 million in due to related parties, and an increase of $0.1 million in accrued expenses and other current liabilities incurred for professional consulting expenses since the closing of the Business Combination. Net cash used in operating activities for the year ended December 31, 2023 was approximately $0.7 million, primarily attributable to net loss of approximately $1.8 million, adjusted for non-cash share-based compensation expenses of approximately $0.3 million, share-based settlement expenses of approximately $0.5 million, and an increase of approximately $0.2 million in amounts due to related parties which paid certain operating expenses on behalf of us. 65 Investing activities For the year ended December 31, 2024, we reported cash provided by investing activities of approximately $0.9 million, which was from the reverse acquisition we closed with FLFV in June 2024. For the year ended December 31, 2023, we did not report cash provided by or used in investing activities. Financing Activities For the year ended December 31, 2024, we reported cash provided by financing activities of approximately $0.2 million, which were primarily provided by subscription fees of $0.4 million from shareholders in the private placements raised by TP Holdings, borrowings of approximately $1.0 million from our controlling shareholder, and proceeds of approximately $0.2 million from investors pursuant to Forward Purchase Agreement, partially offset by payment of offering cost of approximately $1.0 million and payment of approximately $0.4 million of extension loans on behalf of the Sponsor. For the year ended December 31, 2023, we reported cash provided by financing activities of approximately $0.6 million, which were primarily provided by subscription fees of approximately $1.8 million advanced from shareholders, partially offset by payment of approximately $0.6 million of extension loans on behalf of the sponsor of a SPAC and payment of approximately $0.4 million of offering costs. Commitment and Contingencies On June 21, 2024, the Company entered into an escrow agreement (the “Escrow Agreement”) with Mr. Wellen Sham, Yuanmei Ma and CST, pursuant to which, among other things, (1) CST will act as the escrow agent under the Escrow Agreement; (2) at the closing of the Business Combination, the Company deposited with CST 20,000,000 shares of common stock as Earnout Shares, to be held by CST in a segregated escrow account (“Earnout Escrow Account”); and (3) if any portion of the Earnout Shares becomes eligible for release in accordance with the terms of the Escrow Agreement, CST will release the applicable portion of the Earnout Shares from the Earnout Escrow Account in accordance with the terms of the Escrow Agreement and disburse to each eligible recipient the applicable portion of Earnout Shares therefrom. The Earnout Shares shall be released or otherwise forfeited as follows: (i) an aggregate of 5,000,000 Earnout Shares (the “Tranche 1 Earnout Shares”) will be vested, if and only if, on the occurrence that the amount of sales/revenues of the Company for any of the fiscal years (such fiscal year is referred to as “Tranche 1 Fiscal Year”) ending from December 31, 2023 to December 31, 2025 is no less than $42,200,000 as evidenced by the audited financial statements of the Company prepared in accordance with U.S. GAAP for the Tranche 1 Fiscal Year that is contained in an annual report on Form 10-K filed by the Company with the SEC (the “Tranche 1 Annual Report”); (ii) an aggregate of 15,000,000 Earnout Shares (the “Tranche 2 Earnout Shares”) will be vested, if and only if, on the occurrence that the amount of sales/revenues of the Company for any of the fiscal years (such fiscal year is referred to as “Tranche 2 Fiscal Year”) ending from December 31, 2023 to December 31, 2026 is no less than $415,000,000 as evidenced by the audited financial statements of the Company prepared in accordance with U.S. GAAP for the Tranche 2 Fiscal Year that is contained in an annual report on Form 10-K filed by the Company with the SEC (the “Tranche 2 Annual Report”); (iii) Within five (5) business days following the determination that all or any portion of the Tranche 1 Earnout Shares or Tranche 2 Earnout Shares become vested, the Company, together with Mr. Sham and Ms. Ma, shall instruct the Escrow Agent to irrevocably and unconditionally release the vested tranche of Earnout Shares from the Escrow Account in accordance with the terms of the Escrow Agreement to certain of the Company’s shareholders. Each tranche of Earnout Shares may be released only once, but more than one tranche can be released in any year in accordance with the Escrow Agreement. The Earnout Shares are determined as contingent consideration in connection with the reverse recapitalization. In addition, the issuance of Earnout Shares does not meet any condition to be classified as a liability under ASC 815, thus it should be classified as an equity financial instrument, and measure at fair value using the quoted market price on grant date, June 11, 2024, which was $2.56 per share. 66 For the years ended December 31, 2024, the sales/revenue condition described above was not met. Currently the Company could not reasonably assess the performance condition for the year ending December 31, 2025. Other than the above, in the normal course of business, we are subject to loss contingencies, such as certain legal proceedings, claims and disputes. We record a liability for such loss contingencies when the likelihood of an unfavorable outcome is probable and the amount of loss can be reasonably estimated. Off-Balance Sheet Arrangements We have not entered into any financial guarantees or other commitments to guarantee the payment obligations of any third parties. In addition, we have not entered into any derivative contracts that are indexed to the shares of our common stock and classified as shareholder’s equity or that are not reflected in our consolidated 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 product development services with us. Research and Development We have incurred minimal research and development expenses for the years ended December 31, 2024 and 2023. The researched and development expenses were recorded in “general and administrative expenses” in the consolidated statements of operations. Critical Accounting Estimates We prepare our financial statements in accordance with U.S. GAAP, which requires our management to make judgments, estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities on the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. We continually evaluate these judgments, estimates and assumptions based on our own historical experience, knowledge and assessment of current business and other conditions, our expectations regarding the future based on available information and various assumptions that we believe to be reasonable, which together form our basis for making judgments about matters that are not readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, our actual results could differ from those estimates. Some of our accounting policies require a higher degree of judgment than others in their application. The selection of critical accounting policies, the judgments and other uncertainties affecting application of those policies and the sensitivity of reported results to changes in conditions and assumptions are factors that should be considered when reviewing our financial statements. We believe the following accounting policies involve the most significant judgments and estimates used in the preparation of our financial statements. You should read the description of critical accounting policies, judgments and estimates in conjunction with our consolidated financial statements and other disclosures included in this Annual Report. We do not have critical accounting estimates that are related to us. A list of accounting policies, judgements and estimates that are relevant to us is included in notes to our consolidated financial statements included elsewhere in this Annual Report (see “ Note 2 – Summary of Significant Accounting Policies ”). Recently Issued Accounting Pronouncements The Company has evaluated all recently issued accounting pronouncements and believes such pronouncements do not have a material effect on the Company’s condensed consolidated financial statements. A list of recently issued accounting pronouncements that are relevant to us is included in the notes to our consolidated financial statements included elsewhere in this Annual Report (see “ Note 2 – Summary of Significant Accounting Policies ”). 67 Item 7A. Quantitative and Qualitative Disclosures About Market Risk Under SEC rules and regulations, because we are considered to be a “smaller reporting company”, we are not required to provide the information required by this item in this report. Item 8. Financial Statements and Supplementary Data The Financial Statements and Supplementary Data required by this Item 8 are incorporated by reference to information beginning on Page F-1 of this Form 10-K. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures None.