Form 424B3 Quanergy Systems, Inc.

Form 424B3 Quanergy Systems, Inc.

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November 28, 2022 7:11 PM EST

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Filed Pursuant to Rule 424(b)(3)

Registration No. 333-264115

PROSPECTUS SUPPLEMENT NO. 11

(To the Prospectus dated May 13, 2022)

128,397,923 Shares of Common Stock

_______________

This prospectus supplement supplements the prospectus, dated May 13, 2022 (the “Prospectus”), which forms a part of our registration statement on Form S-1 (No. 333-264115). This prospectus supplement is being filed to update and supplement the information in the Prospectus with the information contained in our Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission (the “SEC”) on November 14, 2022 (the “Quarterly Report”). Accordingly, we have attached the Quarterly Report to this prospectus supplement.

The Prospectus and this prospectus supplement relate to the resale or other disposition from time to time of (i) up to 3,397,923 shares of our common stock, $0.0001 par value per share, issuable upon the exercise of a warrant to purchase our common stock (the “GEM Warrant”) and (ii) up to 125,000,000 shares of our common stock by GEM Yield Bahamas Ltd. (“GYBL”) and GEM Global Yield LLC SCS (“GEM Investor”), or other selling securityholders.

The shares of common stock being offered by the selling securityholders have been or may be issued pursuant to the Share Purchase Agreement, dated December 12, 2021, that CITIC Capital Acquisition Corp. entered into with GYBL and GEM Investor (as amended, the “GEM Agreement”). We are not selling any securities under this prospectus and will not receive any of the proceeds from the sale of shares by the selling securityholders. However, we will receive proceeds from any shares issued pursuant to the exercise of the GEM Warrant through the payment of the exercise price in cash and the sale of common stock from any draw downs under the GEM Agreement.

The common stock and Warrants are listed on the New York Stock Exchange (“NYSE”) under the symbols “QNGY” and “QNGY WS,” respectively. Trading in these securities was suspended on the NYSE after the market close on November 8, 2022. On November 25, 2022, the last reported sales price of our common stock on the over-the-counter market was $0.33 per share and the last reported sales price of our Warrants was $0.02 per warrant.

This prospectus supplement should be read in conjunction with the Prospectus, including any amendments or supplements thereto, which is to be delivered with this prospectus supplement. This prospectus supplement is qualified by reference to the Prospectus, including any amendments or supplements thereto, except to the extent that the information in this prospectus supplement updates and supersedes the information contained therein.

This prospectus supplement is not complete without, and may not be delivered or utilized except in connection with, the Prospectus, including any amendments or supplements thereto.

We are an “emerging growth company” as defined under U.S. federal securities laws and, as such, have elected to comply with reduced public company reporting requirements. The Prospectus complies with the requirements that apply to an issuer that is an emerging growth company.

Investing in our securities involves a high degree of risk. You should review carefully the risks and uncertainties described in the section titled “Risk Factors” beginning on page 8 of the Prospectus and under similar headings in any amendments or supplements to the Prospectus.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities, or passed upon the accuracy or adequacy of this prospectus supplement or the Prospectus. Any representation to the contrary is a criminal offense.

Prospectus Supplement dated November 28, 2022

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2022

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 001-39222

QUANERGY SYSTEMS, INC.

(Exact name of registrant as specified in its charter)



Delaware	88-0535845
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

433 Lakeside Drive Sunnyvale, California	94085
(Address of Principal Executive Offices)	(Zip Code)

(408) 245-9500

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading symbol(s)	Name of each exchange on which registered
Common Stock, $0.0001 par value per share	QNGY	New York Stock Exchange
Warrants, each whole warrant exercisable for one share of Common Stock at an exercise price of $230.00 per share	QNGY WS	New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:


Large accelerated filer	☐	Accelerated filer	☐

Non-accelerated filer	☒	Smaller reporting company	☒

		Emerging growth company	☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒

As of November 10, 2022, there were 16,164,406 shares of the registrant’s common stock outstanding.

QUANERGY SYSTEMS, INC.

TABLE OF CONTENTS


		Page
PART I - FINANCIAL INFORMATION		1

ITEM 1.	FINANCIAL STATEMENTS (UNAUDITED)	1

	CONDENSED CONSOLIDATED BALANCE SHEETS	1

	CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS	2

	CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS	3

	CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)	4

	CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS	6

	NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS	7

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	25

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	39

ITEM 4.	CONTROLS AND PROCEDURES	39

PART II - OTHER INFORMATION		40

ITEM 1.	LEGAL PROCEEDINGS	40

ITEM 1A.	RISK FACTORS	40

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	67

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	67

ITEM 4.	MINE SAFETY DISCLOSURES	67

ITEM 5.	OTHER INFORMATION	67

ITEM 6.	EXHIBITS	68

SIGNATURES		69

Part I—Financial Information

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

Quanergy Systems, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except share and per share data)

(unaudited)


	September 30, 2022			December 31, 2021
Assets
Current assets:
Cash and cash equivalents	$	7,064		$	26,106
Restricted cash		70			70
Accounts receivable, net of allowance for doubtful accounts of $224 at September 30, 2022 and December 31, 2021		2,700			645
Inventory		5,593			3,242
Prepaid expenses and other current assets (includes related party assets of $8,801 at September 30, 2022)		10,709			1,138
Total current assets		26,136			31,201
Property and equipment, net		1,664			1,908
Other long-term assets (includes related party assets of $8,557 at September 30, 2022)		12,575			3,539
Total assets	$	40,375		$	36,648
Liabilities and stockholders’ equity / (deficit)
Current liabilities
Accounts payable	$	5,556		$	2,375
Accrued expenses		4,153			2,435
Accrued settlement liability		2,750			2,500
Other current liabilities		5,793			737
Short-term debt		—			34,311
Related party payable		1,070			—
Total current liabilities		19,322			42,358
Long-term debt		—			16,153
Long-term debt - related party		—			16,670
Derivative liability		241			26,017
Other long-term liabilities		9,335			803
Total liabilities		28,898			102,001
Commitments and contingencies
Stockholders’ equity / (deficit):
Common stock, $0.0001 par value. 300,000,000 and 4,003,595 shares authorized as of September 30, 2022 and December 31, 2021, respectively; 7,077,402 and 2,850,876 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively.		1			—
Additional paid-in capital		467,185			242,305
Accumulated other comprehensive loss		(104	)		(61	)
Accumulated deficit		(455,605	)		(307,597	)
Total stockholders’ equity / (deficit)		11,477			(65,353	)
Total liabilities and stockholders’ equity / (deficit)	$	40,375		$	36,648

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

Quanergy Systems, Inc.

Condensed Consolidated Statements of Operations

(in thousands, except share and per share data)

(unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2022			2021			2022			2021
Net sales	$	2,324		$	1,137		$	4,880		$	2,425
Cost of goods sold		2,491			988			6,797			2,245
Gross profit (loss)		(167	)		149			(1,917	)		180
Operating expenses:
Research and development		6,504			3,953			25,769			12,050
Sales and marketing		3,738			1,913			15,026			5,881
General and administrative		6,839			3,950			54,850			13,142
Operating expenses		17,081			9,816			95,645			31,073
Loss from operations		(17,248	)		(9,667	)		(97,562	)		(30,893	)
Other income (expense):
Interest income (expense), net		34			(5,911	)		(40,020	)		(14,872	)
Other expense, net		(438	)		(3,416	)		(10,420	)		(8,400	)
Loss before income taxes		(17,652	)		(18,994	)		(148,002	)		(54,165	)
Income tax provision		—			(5	)		(6	)		(15	)
Net loss	$	(17,652	)	$	(18,999	)	$	(148,008	)	$	(54,180	)
Net loss attributable per share to common stockholders, basic and diluted	$	(2.59	)	$	(5.49	)	$	(25.55	)	$	(16.32	)
Weighted-average shares used to compute net loss attributable per share to common stockholders, basic and diluted		6,824,212			3,463,403			5,793,554			3,320,498

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

Quanergy Systems, Inc.

Condensed Consolidated Statements of Comprehensive Loss

(in thousands)

(unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2022			2021			2022			2021
Net loss	$	(17,652	)	$	(18,999	)	$	(148,008	)	$	(54,180	)
Other comprehensive loss (net of tax):
Foreign currency translation loss		(25	)		(6	)		(43	)		(12	)
Comprehensive loss	$	(17,677	)	$	(19,005	)	$	(148,051	)	$	(54,192	)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

Quanergy Systems, Inc.

Condensed Consolidated Statements of Stockholder’s Equity / (Deficit)

(in thousands, except number of shares) (unaudited)


	Convertible		Common
	Preferred Stock		Stock				Accumulated	Total
	Shares	Amount	Shares	Amount	Additional Paid-in Capital	Accumulated Deficit	Other Comprehensive Loss	Stockholders’ Equity (Deficit)
December 31, 2021 (as previously reported)	7,695,112	$152,978	250,898	$—	$89,327	$(307,597)	$(61)	$(218,331)
Retroactive application of recapitalization (Note 2)	(7,695,112)	(152,978)	2,599,978	—	152,978	—	—	152,978
Balance at December 31, 2021, as adjusted (Note 2)	—	—	2,850,876	—	242,305	(307,597)	(61)	(65,353)
Conversion of 2023 Notes into common stock	—	—	723,223	—	101,978	—	—	101,978
Issuance of common stock upon the reverse capitalization, net of offering costs	—	—	411,610	—	(9,150)	—	—	(9,150)
Offering cost in connection with Business Combination and PIPE financing	—	—	—	—	(12,450)	—	—	(12,450)
Issuance of PIPE shares	—	—	184,750	—	36,950	—	—	36,950
Subsequent issuance of shares for offering costs incurred in connection with Business Combination and PIPE financing	—	—	240,182	—	9,531	—	—	9,531
Issuance of common stock upon vesting of restricted stock units (“RSUs”)	—	—	358,776	—	—	—	—	—
Issuance of common stock warrants	—	—	—	—	17,602	—	—	17,602
Stock-based compensation	—	—	—	—	51,561	—	—	51,561
Shares issued upon exercise of options	—	—	9,892	—	58	—	—	58
Shares issued upon exercise of common stock warrants	—	—	145,379	—	29	—	—	29
Other comprehensive loss	—	—	—	—	—	—	(11)	(11)
Net loss	—	—	—	—	—	(104,682)	—	(104,682)
Balance at March 31, 2022	—	$—	4,924,688	$—	$438,414	$(412,279)	$(72)	$26,063
Issuance of common stock upon vesting of RSUs	—	—	34,961	—	—	—	—	—
Stock-based compensation	—	—	—	—	5,006	—	—	5,006
Shares issued upon draw down of GEM agreement	—	—	1,314,159	1	19,378	—	—	19,379
Shares issued upon exercise of common stock warrants	—	—	206,610	—	41	—	—	41
Other comprehensive loss	—	—	—	—	—	—	(7)	(7)
Net loss	—	—	—	—	—	(25,674)	—	(25,674)
Balance at June 30, 2022	—	$—	6,480,418	$1	$462,839	$(437,953)	$(79)	$24,808
Issuance of common stock upon vesting of RSUs	—	—	43,369	—	—	—	—	—
Stock-based compensation	—	—	—	—	4,708	—	—	4,708
Shares issued upon exercise of options	—	—	4,849	—	15	—	—	15
Shares issued to GEM in exchange for funding	—	—	600,000	—	—	—	—	—
Shares returned to Quanergy on settlement of GEM funding	—	—	(56,729)	—	(377)	—	—	(377)
Shares issued upon exercise of common stock warrants	—	—	5,495	—	—	—	—	—
Other comprehensive loss	—	—	—	—	—	—	(25)	(25)
Net loss	—	—	—	—	—	(17,652)	—	(17,652)
Balance at September 30, 2022	—	$—	7,077,402	$1	$467,185	$(455,605)	$(104)	$11,477

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

Quanergy Systems, Inc.

Condensed Consolidated Statements of Stockholder’s Equity / (Deficit)

(in thousands, except number of shares)

(unaudited)


	Convertible		Common				Accumulated
	Preferred Stock		Stock				Other	Total
	Shares	Amount	Shares	Amount	Additional Paid-in Capital	Accumulated Deficit	Comprehensive Loss	Stockholders’ Deficit
Balance at December 31, 2020 (as previously reported)	7,695,112	$152,978	234,785	$—	$55,310	$(244,053)	$(61)	$(188,804)
Retroactive application of recapitalization (Note 2)	(7,695,112)	(152,978)	2,553,566	—	152,978	—	—	152,978
Balance at December 31, 2020, as adjusted (Note 2)	—	—	2,788,351	—	208,288	(244,053)	(61)	(35,826)
Shares issued upon exercise of options	—	—	3,878	—	74	—	—	74
Issuance of common stock warrants	—	—	—	—	21,971	—	—	21,971
Issuance of Restricted Stock Awards (“RSAs”)	—	—	58,199	—	563	—	—	563
Stock-based compensation	—	—	—	—	1,017	—	—	1,017
Other comprehensive gain	—	—	—	—	—	—	5	5
Net loss	—	—	—	—	—	(14,714)	—	(14,714)
Balance at March 31, 2021	—	$—	2,850,428	$—	$231,913	$(258,767)	$(56)	$(26,910)
Vesting of RSAs	—	—		—	4,659	—	—	4,659
Stock-based compensation	—	—	—	—	1,065	—	—	1,065
Other comprehensive gain	—	—	—	—	—	—	(11)	(11)
Net loss	—	—	—	—	—	(20,467)	—	(20,467)
Balance at June 30, 2021	—	$—	2,850,428	$—	$237,637	$(279,234)	$(67)	$(41,664)
Exercise of common stock warrants	—	$—	448	$—	$—	$—	$—	—
Vesting of RSAs	—	—	—	—	2,356	—	—	2,356
Stock-based compensation	—	—	—	—	994	—	—	994
Other comprehensive gain	—	—	—	—	—	—	(6)	(6)
Net loss	—	—	—	—	—	(18,999)	—	(18,999)
Balance at September 30, 2021	—	$—	2,850,876	$—	$240,987	$(298,233)	$(73)	$(57,319)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

Quanergy Systems, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands) (unaudited)


	Nine Months Ended September 30,
	2022			2021
Cash flows from operating activities
Net loss	$	(148,008	)	$	(54,180	)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation		61,520			10,654
Non-cash interest expense		40,071			14,641
Change in fair value of derivative liabilities		771			10,916
Change in fair value of share-settled forward asset		9,649			—
Non-cash bonus expense		2,310			—
Depreciation and amortization		697			720
Non-cash lease expense		446			—
Paid-in-kind interest and accrued interest on repayment of 2022 Notes		(9,341	)		—
Gain on extinguishment of debt		—			(2,515	)
Other		—			(69	)
Changes in operating assets and liabilities:
Accounts receivable		(2,055	)		(80	)
Inventory		(2,351	)		958
Prepaid expenses and other current assets		(769	)		123
Other long-term assets		(461	)		(2,717	)
Accounts payable		2,916			192
Accrued expenses		(22	)		(290	)
Accrued settlement liability		250			—
Other current liabilities		(661	)		(41	)
Other long-term liabilities		87			(360	)
Net cash used in operating activities		(44,951	)		(22,048	)
Cash flows from investing activities
Purchases of property and equipment		(454	)		(18	)
Net cash used in investing activities		(454	)		(18	)
Cash flows from financing activities
Related party proceeds from PIPE financing		36,950			—
Proceeds from Business Combination and PIPE financing		13,414			—
Proceeds from draw down on GEM Agreement		9,900			—
Payments of offering costs		(8,188	)		—
Repayment of 2022 Notes		(25,813	)		—
Proceeds from exercise of stock options		73			74
Proceeds from exercise of common stock warrants		70			—
Proceeds from issuance of convertible notes		—			37,130
Proceeds from issuance of convertible notes to related parties		—			11,475
Net cash provided by financing activities		26,406			48,679
Effect of exchange rate changes on cash, cash equivalents and restricted cash		(43	)		(12	)
Net increase (decrease) in cash, cash equivalents and restricted cash		(19,042	)		26,601
Cash, cash equivalents and restricted cash at beginning of period		26,176			7,668
Cash, cash equivalents and restricted cash at end of period	$	7,134		$	34,269
Supplemental disclosures of cash flow information:
Cash paid during the period for interest	$	9,326		$	289
Supplemental schedule of noncash investing and financing activities:
Conversion of redeemable convertible preferred stock to common stock	$	152,978		$	—
Conversion of 2023 Notes into equity	$	101,978		$	—
Issuance of common stock warrants	$	17,602		$	21,970
Assumption of net liabilities from Business Combination	$	15,956		$	—
Issuance of share-settled forward asset	$	10,027		$	—
Offering costs paid in common stock	$	9,531		$	—
GEM commitment fee	$	2,500		$	—
Fair value of debt derivative liabilities related to issuance of convertible notes	$	—		$	17,540

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

(1) Basis of Presentation and Summary of Significant Accounting Policies

Description of Business

Quanergy Systems, Inc. (the “Company” or “Quanergy”) formerly known as CITIC Capital Acquisition Corp., designs, develops and produces Light Detection and Ranging (“LiDAR”) sensors and is a leader in 3D sensing that delivers robust and intelligent real-time 3D object detection and classification solutions.

CITIC Capital Acquisition Corp. (“CCAC”), the Company’s predecessor, was incorporated as a Cayman Islands exempted special purpose acquisition company. On February 7, 2022, CCAC effectuated the change of the Company’s jurisdiction of incorporation to the state of Delaware. Accordingly, each of CCAC’s issued and outstanding Class A Ordinary Shares and Class B Ordinary Shares automatically converted on a one-for-one basis, into shares of common stock of the CCAC (“Common Stock”). Similarly, all of CCAC’s outstanding warrants became warrants to acquire shares of the Company’s common stock, and no other changes were made to the terms of any outstanding warrants.

Business Combination

On February 8, 2022 (the “Closing Date” or “Closing”), the Company consummated the business combination (the “Business Combination”) pursuant to the terms of the Agreement and Plan of Merger, dated as of June 21, 2021 (as amended, the “Merger Agreement”), by and among CCAC, CITIC Capital Merger Sub Inc. (“Merger Sub”), and Quanergy Systems, Inc. (when referred to in its pre-Business Combination (as defined below) capacity, “Legacy Quanergy”). Pursuant to the terms of the Merger Agreement, the Business Combination between the Company and Legacy Quanergy was effected through the merger of Merger Sub with and into Legacy Quanergy, with Legacy Quanergy continuing as the surviving corporation and a wholly-owned subsidiary of the Company. On the Closing Date, the registrant changed its name from CITIC Capital Acquisition Corp. to Quanergy Systems, Inc. On January 28, 2022, Legacy Quanergy changed its corporate name to Quanergy Perception Technologies, Inc. In connection with the Business Combination, holders of 1,343,390 of CCAC’s Class A Ordinary Shares, or approximately 97.3% of the shares with redemption rights, exercised their right to redeem their shares for cash at a redemption price of approximately $201.36 per share, for an aggregate redemption amount of $270.5 million. On the Closing Date, holders of 30,000 of CCAC’s Class A Ordinary Shares, or approximately 2.2% of the shares with redemption rights, reversed their prior redemptions, resulting in $6.0 million being returned to the trust account established at the consummation of CCAC’s initial public offering prior to the Closing.

Pursuant to the terms of the Merger Agreement, at the effective time of the Business Combination:

•

All outstanding shares of Legacy Quanergy common stock were cancelled and converted into shares of Quanergy using a conversion ratio of 0.1940 (“Exchange Ratio”);

•

All outstanding shares of Legacy Quanergy convertible preferred stock were cancelled and converted into shares of Quanergy’s common stock (all preferred stock except for Series B and Series C were cancelled and converted using a ratio of 0.1940; Series B and Series C were converted using ratios of 0.5771 and 0.7155, respectively);

•

All outstanding stock options, Restricted Stock (“RSAs”), Restricted Stock Unit Awards (“RSUs”) and common stock warrants of Legacy Quanergy, whether vested or unvested, were assumed by the Company and converted into stock options, Restricted Stock, Restricted Stock Unit Awards and common stock warrants of Quanergy;

•

The Note Financing Agreement issued in 2020 (the “2023 Initial Notes) and 2021 (the “Extension Notes”, and together with 2023 Initial Notes, referred to as the “2023 Notes”) converted into shares of Legacy Quanergy common stock, that subsequently converted into shares of common stock of Quanergy at the rate consistent with the terms of the note agreement;

•

Legacy Quanergy’s indebtedness under the Note Financing Agreement issued in 2018 was paid off;

•

All outstanding CCAC Class A and Class B Ordinary Shares were cancelled and converted into shares of common stock of Quanergy;

•

All outstanding warrants of CCAC converted automatically into warrants to purchase Quanergy common stock at a ratio of 1.0 to 1.0.

On the Closing Date, certain investors (the “PIPE Investors”) purchased from the Company an aggregate of 184,750 shares (the “PIPE Shares”) of Common Stock at a price of $200.00 per share, for an aggregate purchase price of approximately $37.0 million (the “PIPE Financing”), in a private placement pursuant to separate subscription agreements consummated substantially concurrently with the close of the Business Combination.

The Company’s common stock and public warrants are now listed on the New York Stock Exchange under the symbols “QNGY” and “QNGY WS”. Trading of these securities has been suspended pending the outcome of a delisting determination made by the staff of

NYSE Regulation, which the Company intends to appeal. The Company’s common stock and public warrants are currently traded on the over-the-counter market under the symbols “QNGY” and “QNGYW”, respectively. Unless the context otherwise requires, “we,” “us,” “our,” “Quanergy,” and the “Company” refers to Quanergy Systems, Inc., the combined company and its subsidiaries following the Business Combination. Refer to “Note 2 – Reverse Recapitalization” for further discussion of the Business Combination.

Basis of Presentation and Consolidation

The accompanying interim unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).

The condensed consolidated financial statements as of September 30, 2022 are unaudited. The condensed consolidated balance sheet as of December 31, 2021, included herein was derived from the audited consolidated financial statements as of that date. Certain information and note disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. As such, the information included herein should be read in conjunction with the audited consolidated financial statements and accompanying notes as of and for the year ended December 31, 2021, which was included in the Company’s Form S-1/A filed with the Securities and Exchange Commission (“SEC”) on October 24, 2022.

The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. The Company’s fiscal year begins on January 1 and ends on December 31.

In the opinion of the Company’s management, the unaudited condensed consolidated financial statements include all adjustments necessary for the fair presentation of the Company’s balance sheet as of September 30, 2022, the results of operations, including its comprehensive loss, and stockholders’ equity/(deficit) for the three and nine months ended September 30, 2022 and 2021, and the statements of cash flows for the nine months ended September 30, 2022 and 2021. All adjustments are of a normal recurring nature. The results for the three and nine months ended September 30, 2022 are not necessarily indicative of the results to be expected for any subsequent quarter or for the fiscal year ending December 31, 2022.

Summary of Significant Accounting Policies

The Company’s significant accounting policies are disclosed in Summary of Significant Accounting Policies in the notes to the audited consolidated financial statements for the fiscal year ended December 31, 2021. Other than the accounting policies discussed below related to the adoption of Accounting Standards Codification (“ASC”) 842, Leases, there has been no material change to the Company’s significant accounting policies during the nine months ended September 30, 2022. See “Recently Adopted Accounting Pronouncements” and “Note 13 – Leases” related to the adoption of ASC 842.

Liquidity and Capital Resources

The Company has prepared its condensed consolidated financial statements assuming that the Company will continue as a going concern. The Company has had recurring losses and an accumulated deficit since its inception. The Company obtained additional funding of $43.8 million in connection with the Business Combination and effectively settled its outstanding debt balance of $106 million, thereby providing the Company with additional future financial flexibility. The Business Combination also gave the Company access to $125 million from a previously announced share subscription facility from Global Emerging Markets Group (“GEM”), a Luxembourg-based private alternative investment group. Through September 30, 2022, the Company has received $9.9 million in cash under the facility in exchange for 1.3 million shares of common stock. In October 2022, the Company settled a second draw down under the facility for $1.7 million in cash in exchange for 320,000 shares of common stock. As a result of the suspension of trading the Company’s common stock on the NYSE, commencing on November 8, 2022, the Company is not currently able to access the GEM facility. On November 2, 2022, the Company completed a registered public offering from which it received net proceeds of $15.4 million in cash. As part of the public offering, the Company issued and sold 9,800,000 units, each consisting of one share of common stock, and two warrants, each with a term of 5 years to purchase one share of common stock at an exercise price of $1.70 per share. See “Note 19 - Subsequent Events” for additional details related to the registered public offering. Should the Company continue to be unable to access the GEM facility, or if the Company is unable to raise additional capital, it would be forced to seek other forms of financing which may not be available in sufficient amounts to fund its operations. These conditions raise substantial doubt about the Company’s ability to continue as a going concern for a period of twelve months following the date of issuance of financial statements as of and for the nine months ended September 30, 2022. These condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

COVID-19 Considerations

The extensive impact of the pandemic caused by the novel coronavirus (“COVID-19”) has adversely affected global economic conditions and has contributed to significant volatility in financial markets beginning in early calendar year 2020. The continually

evolving pandemic remains uncertain and its future impact on Quanergy will depend on a number of factors, including among others, the continued duration and severity of the spread of COVID-19, emerging variants, vaccine and booster effectiveness, public acceptance of safety protocols, and government measures. The impact of COVID-19 on the Company’s business has lessened slightly in the third quarter of 2022, as evidenced by improved demand conditions and reduced lead time supply constraints; however, the Company continues to experience upward pressures on pricing premiums for component parts utilized in its manufacturing processes. The Company anticipates that the pandemic may continue to impact its operations and financial operating results, and there is uncertainty in the nature and degree of its continued effects over time.

Reverse Stock Split

On October 3, 2022, the Company held a special meeting of our stockholders wherein our stockholders approved a reverse split of the Company’s outstanding common stock at a ratio in the range of 1-for-10 to 1-for-20, to be determined at the discretion of our Board of Directors. Following such meeting, our Board of Directors approved a final reverse stock split ratio of 1-for-20. The reverse stock split does not change the par value of the Company’s common and preferred stock or the authorized number of common or preferred stock. All issued and outstanding common stock and related per share amounts contained in the condensed consolidated financial statements and footnotes have been retroactively adjusted to reflect this reverse stock split for all periods presented. The reverse stock split was effected on October 6, 2022.

Recently Adopted Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires lessees to recognize leases on the balance sheet and disclose key information about leasing arrangements. The Company adopted ASC 842 on January 1, 2022, using the modified retrospective transition method, which applies the standard as of the adoption date and therefore, the Company has not applied the standard to the comparative prior periods presented in the Company’s condensed consolidated financial statements. The Company elected the following practical expedients:

(i)

not to reassess prior conclusions on whether any expired or existing contracts are or contain a lease, lease classification, and initial direct costs;

(ii)

combine lease and non-lease components; and

(iii)

not to recognize right-of-use (“ROU”) assets or lease liabilities for short term leases, with lease terms of 12 months or less.

The Company’s operating leases primarily comprise of office facilities, with the most significant leases relating to corporate headquarters in Sunnyvale, CA. Upon adoption of the new leasing standard on January 1, 2022, the Company recognized ROU assets of $0.5 million and lease liabilities of $0.5 million. There was no cumulative impact of transition to retained earnings as of the adoption date. The standard did not impact the accompanying condensed consolidated statements of operations and the accompanying condensed consolidated statements of cash flows.

In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options (a consensus of the FASB Emerging Issues Task Force). This guidance clarifies certain aspects of the current guidance to promote consistency among reporting of an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified after modification or exchange. The amendments in this update are effective for all entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. The Company adopted the standard on January 1, 2022 and the standard did not impact the accompanying condensed consolidated financial statements.

Recently Issued Accounting Pronouncements

In June 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses of Financial Instruments, which, together with subsequent amendments, amends the requirement on the measurement and recognition of expected credit losses for financial assets held. ASU 2016-13 is effective for the Company beginning January 1, 2023, with early adoption permitted. The Company is evaluating the effects of adopting this new accounting guidance, including developing models to estimate expected credit losses, designing changes to its related processes and evaluating the effects on the Company’s consolidated financial statements. As the Company's receivables are generally short-term in nature, the timing and amount of credit loss recognized under existing guidance and the new guidance is not expected to materially differ.

In August 2020, the FASB issued ASU 2020-06, Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815- 40): Accounting for convertible instruments and contracts in an entity’s own equity. The ASU simplifies accounting for convertible instruments by removing certain separation models required under current

U.S. GAAP. The ASU also removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, and it revises the guidance in ASC 260, Earnings Per Share, to require entities to calculate diluted earnings per share for convertible instruments by using the if-converted method. The amendments are effective for the Company beginning January 1, 2024, with early adoption permitted. The Company is currently assessing the impact of this standard on its consolidated financial statements.

(2) Reverse Recapitalization

The Business Combination was accounted for as a reverse recapitalization for financial accounting and reporting purposes. Accordingly, Legacy Quanergy was deemed the accounting acquirer (and legal acquiree) and CCAC was treated as the accounting acquiree (and legal acquirer). Under this method of accounting, the reverse recapitalization was treated as the equivalent of Legacy Quanergy issuing stock for the net assets of CCAC, accompanied by a recapitalization. The net assets of CCAC are reflected at historical cost, with no goodwill or other intangible assets recorded. The consolidated assets, liabilities, and results of operations prior to the Business Combination are those of Legacy Quanergy. The shares and corresponding capital amounts and earnings per share available for common stockholders, prior to the Business Combination, have been retroactively restated as shares reflecting the Exchange Ratio.

Upon the closing of the Business Combination and the PIPE Financing, the Company received net cash proceeds of $43.8 million. The following table reconciles the elements of the Business Combination to the condensed consolidated statements of cash flows and the condensed consolidated statements of stockholders’ equity for the nine months ended September 30, 2022 (in thousands):


Cash - CCAC’s trust and cash (net of redemption)	$	13,414
Cash - PIPE		36,950
Less: transaction costs and advisory fees paid		(6,609	)
Net cash from Business Combination and PIPE Financing		43,755
Less non-cash net liabilities assumed from CCAC		(15,955	)
Net contributions from Business Combination and PIPE Financing	$	27,800

The number of shares of common stock issued immediately following the consummation of the Business Combination were:


CCAC Class A Ordinary Shares, outstanding prior to Business Combination	1,380,000
CCAC Class B Ordinary Shares, outstanding prior to Business Combination	345,000
Less: redemption of CCAC Class A Ordinary Shares	(1,313,390	)
Shares issued from PIPE Financing	184,750
Total Shares from Business Combination and PIPE Financing	596,360
Legacy Quanergy shares(1)	3,574,099
Total shares of common stock immediately after Business Combination	4,170,459

(1) The number of Legacy Quanergy shares was determined as follows:


	Quanergy shares	Quanergy shares, effected for Exchange Ratio
Balance at December 31, 2020	234,785	911,017
Recapitalization applied to Convertible Preferred Stock outstanding at December 31, 2020	7,695,112	1,877,334
Shares issued upon exercise of options - 2021	999	3,878
Shares issued upon exercise of common stock warrants - 2021	115	448
Issuance of restricted stock awards	14,999	58,199
Conversion of 2023 Notes(2)	186,380	723,223
Total		3,574,099

(2) The 2023 Notes convert into shares of common stock of Quanergy at the rate consistent with the terms of note agreement.

In connection with the Business Combination, the Company incurred direct and incremental costs of approximately $12.5 million related to legal, accounting, and other professional fees, which were offset against the Company’s additional paid-in capital. The Company repaid $9.5 million of acquisition-related fees in shares of the combined company.

(3) Inventory

Inventory consisted of the following (in thousands):


	September 30, 2022		December 31, 2021
Raw materials	$	4,830	$	2,292
Work in progress		266		578
Finished goods		497		372
Total inventory	$	5,593	$	3,242

(4) Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consisted of the following (in thousands):


	September 30, 2022		December 31, 2021
Sensata prepaid services	$	8,801	$	—
Prepaid business insurance		1,710		873
Prepaid other		197		265
Total prepaid expenses and other current assets	$	10,709	$	1,138

(5) Property and Equipment, Net

Property and equipment, net consisted of the following (in thousands):


	September 30, 2022			December 31, 2021
Machinery and equipment	$	6,018		$	5,568
Furniture and fixtures		182			182
Computer equipment		1,011			1,008
Computer software		35			35
Leasehold improvements		349			349
Total property and equipment		7,595			7,142
Less: accumulated depreciation and amortization		(5,931	)		(5,234	)
Total property and equipment, net	$	1,664		$	1,908

Depreciation and amortization expense for the three and nine months ended September 30, 2022 and 2021 was $0.2 million and $0.7 million, respectively.

(6) Other Long-term Assets

Other long-term assets consisted of the following (in thousands):


	September 30, 2022		December 31, 2021
Sensata prepaid services	$	8,557	$	—
Deferred costs		2,766		3,403
ROU asset		1,119		—
Security deposit		133		136
Total other long-term assets	$	12,575	$	3,539

(7) Other Current Liabilities

Other current liabilities consisted of the following (in thousands):


	September 30, 2022		December 31, 2021
GEM commitment fee	$	2,302	$	—
Transaction fees payable		2,000		—


Lease liability		1,075		—
Restructuring liability		122		293
Customer deposits		200		200
Deferred revenue		94		72
Derivative liability		—		172
Total other current liabilities	$	5,793	$	737

(8) Other Long-term Liabilities

Other long-term liabilities consisted of the following (in thousands):


	September 30, 2022		December 31, 2021
Transaction fees payable	$	7,660	$	—
Customer deposits		750		750
Deferred revenue		122		4
Other long-term liabilities		759		49
Lease liability		44		—
Total other long-term liabilities	$	9,335	$	803

(9) Fair Value Measurements

The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Company determines fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market.

When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels:

•

Level 1 inputs: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date.

•

Level 2 inputs: Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.

•

Level 3 inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date.

The following table sets forth the Company’s financial assets and liabilities that were measured at fair value, on a recurring basis (in thousands):


	As of September 30, 2022
	Level 1		Level 2		Level 3		Total
Financial Assets
Cash and cash equivalents
Money market funds	$	6,881	$	—	$	—	$	6,881
Total assets at fair value	$	6,881	$	—	$	—	$	6,881
Financial Liabilities
Private placement warrant liability	$	—	$	241	$	—	$	241
Total liabilities at fair value	$	—	$	241	$	—	$	241


	As of December 31, 2021
	Level 1		Level 2		Level 3		Total
Financial Assets
Cash and cash equivalents:
Money market funds	$	26,031	$	—	$	—	$	26,031
Total assets	$	26,031	$	—	$	—	$	26,031
Financial Liabilities
Debt derivative liabilities	$	—	$	—	$	26,189	$	26,189
Total liabilities	$	—	$	—	$	26,189	$	26,189

The fair value of accounts receivable, accounts payable, and accrued expenses approximate their carrying values as of September 30, 2022 and December 31, 2021, due to their short-term nature. The Company records long-term debt and long-term debt due to related parties on an amortized cost basis.

At September 30, 2022, Level 2 instruments consist solely of the Company's Private Placement Warrants, for which fair value is determined by using the directly observable market price of the Company's Public Warrants as traded on the New York Stock Exchange. The Company has determined that the market price of its Public Warrants may be used to calculate the fair value of the Private Placement Warrants as the terms and provisions of each are identical except for a redemption feature as further described in “Note 10 - Common Stock”.

In prior periods, fair value of the Private Placement Warrants was determined by utilizing a Black Scholes Options Pricing Model which prioritizes unobservable inputs, and thus was characterized within the Level 3 fair value hierarchy. Inputs were based on the estimated fair value of the underlying stock at the valuation measurement date, the remaining contractual term of the warrant, the risk-free interest rates, the expected dividends, and the expected volatility of the price of the Company’s underlying stock.

The following table presents the changes in the fair value of the Company's Level 3 instruments for the following periods (in thousands). There were no other transfers between fair value hierarchies for all periods presented:


	Level 3
	Warrant Liabilities			Share-settled Forward
Fair value at February 8, 2022	$	3,248		$	—
Change in fair value of Private Placement Warrants		(1,439	)		—
Fair value at March 31, 2022	$	1,808		$	—
Change in fair value of Private Placement Warrants		(1,312	)		—
Transfer to Level 2		(496	)		—
Fair Value at issuance of shares		—			10,027
Change in fair value of Share-settled forward		—			(8,956	)
Fair value at June 30, 2022	$	—		$	1,071
Change in fair value of Share-settled forward		—			(693	)
Settlement of Share-settled forward		—			(378	)
Fair value at September 30, 2022	$	—		$	—

The share-settled forward asset represents the Company's right to a return of a variable number of shares of the Company's common stock as part of its $9.9 million draw down agreement with GEM. Prior to settlement of the funding, the fair value of the forward asset was determined to be $0.4 million. The fair value of the forward asset was determined by calculating the number of shares to be returned to Quanergy based on the trading price at date of issuance and the average trading price over 40 consecutive trading days, ending July 22, 2022. The GEM draw down of $9.9 million was settled on July 25, 2022. See “Note 10 - Common Stock” for additional information on the GEM Agreement and the share-settled forward.

For the three and nine months ended September 30, 2022, the Company recognized a gain from a decrease in the fair value of the Private Placement Warrants of approximately $0.3 million and $3.0 million, respectively, presented in other expense, net on the accompanying condensed consolidated statements of operations. For the three and nine months ended September 30, 2022, the Company recognized a loss for the change in fair value of the forward asset of approximately $0.7 million and $9.6 million, respectively, recorded in other income (expense), net on the condensed consolidated statements of operations.

At December 31, 2021, Level 3 instruments consist solely of embedded derivatives in the Company’s convertible notes, which are classified within Level 3 of the fair value hierarchy due to a lack of observable market data. The convertible notes were subsequently derecognized in February 2022 as part of the Business Combination. See “Note 12 – Borrowing Arrangements” for details on the valuation of the embedded derivative in the convertible notes at December 31, 2021.

Long-term and short-term debt is reported in the consolidated balance sheets at carrying value, rather than fair value, and is therefore excluded from the disclosure above of financial assets and liabilities measured at fair value within the condensed consolidated financial statements. The fair value of the convertible notes was $99.0 million as of December 31, 2021. The carrying value of the convertible notes of $105.8 million, net of $38.6 million of unamortized debt discount and issuance costs, was recorded as long-term debt totaling $16.2 million, long-term debt—related party totaling $16.7 million, and short-term debt totaling $34.3 million as of December 31, 2021.

(10) Common Stock

Shares Authorized and Outstanding

As of September 30, 2022, the Company had authorized a total of 310,000,000 shares for issuance, with 300,000,000 shares designated as common stock and 10,000,000 shares designated as preferred stock.

On Closing Date, all outstanding shares of Legacy Quanergy common stock and convertible preferred stock (except Series B and Series C convertible preferred stock) were cancelled and converted into shares of Quanergy using a conversion ratio of 0.1940 in accordance with the terms of the Merger Agreement. Series B and Series C were cancelled and converted using a ratio of 0.5771 and 0.7155, respectively, in accordance with the terms of the Merger Agreement. There were 4,170,459 shares of common stock outstanding immediately after the consummation of the Business Combination, excluding contingent shares.


	February 8, 2022
	(Closing Date)
	Preferred Stock Shares		Exchange Ratio		Common Stock Shares
Series Seed Convertible Preferred Stock (Legacy Quanergy)		2,231,248		0.1940		432,831
Series Seed-2 Convertible Preferred Stock (Legacy Quanergy)		495,417		0.1940		96,101
Series A Convertible Preferred Stock (Legacy Quanergy)		3,233,871		0.1940		627,352
Series A Plus Convertible Preferred Stock (Legacy Quanergy)		790,500		0.1940		153,352
Series B Convertible Preferred Stock (Legacy Quanergy)		778,839		0.5771		449,474
Series C Convertible Preferred Stock (Legacy Quanergy)		165,237		0.7155		118,224
Total		7,695,112				1,877,334

GEM Agreement

In December 2021, CCAC and GEM entered into a Share Purchase Agreement (the “GEM Agreement”) for the Company’s liquidity needs post Business Combination. Under the GEM Agreement, the Company was entitled to draw down up to $125 million of gross proceeds, over a three-year period in exchange for shares of the Company’s common stock. The shares of common stock issued in exchange for funding will be determined at a price equal to 90% of the average closing price of the Company’s common stock over a 30-day period.

In exchange for GEM’s commitment to fund, the Company issued to GEM a warrant to purchase common stock of the Company exercisable for up to 2.5% of the outstanding common stock of the Company on a fully diluted basis as of the Closing for a period of three years (the “GEM Warrant”), which warrant was fair valued at $4.0 million at origination of the agreement, and agreed to pay $2.5 million in cash or in shares for the GEM commitment fee by the first anniversary of the Closing Date. At September 30, 2022, the Company has $2.3 million of unamortized deferred offering costs for the commitment fee remaining in other long-term assets, and a $2.3 million commitment fee payable within one year recorded in other current liabilities on the condensed consolidated balance sheet.

The Company accounts for the GEM Agreement as an equity-classified purchase put option. The Company determined that the fair value of the purchase put option approximates the fair value of the GEM warrant issued of approximately $4.0 million. Accordingly, the purchase put option and the common stock warrants are each reflected within equity in connection with the retrospective recapitalization as of December 31, 2021.

In May 2022, the Company drew down $9.9 million on the GEM Agreement. In exchange for funding, Quanergy issued 1,314,159 shares of common stock. The number of shares issued represents three times the fair value of funding received by the Company, based on the closing price of the Company’s stock on the date of the funding request. Based on the GEM Agreement, the number of shares of common stock to settle the drawdown of cash is determined by 90% of the average trading price over a 30-day trading period (“Committed Draw Down Pricing Period”). If the initial issuance of shares is in excess of the number of shares determined to settle the draw down, GEM would have to return the excess shares to Quanergy. In the event there is a shortfall of shares, Quanergy would have to issue more shares to GEM. Subsequently in July 2022, the Company and GEM agreed to extend the Committed Draw Down Pricing Period to 40 consecutive trading days, ending July 22, 2022. To account for the contingently returnable shares of common stock on settlement of funding, the Company recorded a share-settled forward asset of $10.0 million on issuance of shares in prepaid expenses and other current assets on the condensed consolidated balance sheet. Prior to settlement of the funding, the fair value of the forward asset was determined to be $0.4 million. The fair value of the forward asset was determined by calculating the number of shares to be returned to Quanergy at date of issuance and as of the settlement date. The number of shares to be returned was calculated based on 90% of the average trading price for the Committed Draw Down Pricing Period from May 25, 2022 to July 22, 2022.

For the three months and nine months ended September 2022, the Company recognized a loss of $0.7 million and $9.6 million, respectively, as a result of the change in fair value of the forward asset. GEM returned 56,729 shares to the Company on settlement of funding.

In August 2022, in accordance with the GEM Agreement, the Company issued an additional 600,000 shares to GEM. This transaction was recorded as a share subscription arrangement with the shares issued to GEM recorded at par value, and the note receivable from GEM recorded as a contra-equity amount. As such, there was no additional impact to equity for the 600,000 shares issued as of September 30, 2022, other than the par value at issuance. Additionally, potentially returnable shares of common stock were determined to be an equity-classified forward asset recorded at fair value within equity of an immaterial amount. Upon settlement on October 3, 2022, GEM provided $1.7 million in cash consideration and returned 280,000 shares of common stock to the Company.

As a result of the suspension of trading of the Company’s common stock on the NYSE, commencing November 8, 2022, the Company is currently not able to access the GEM facility.

Common Stock Warrants

As of September 30, 2022, the Company had the following common stock warrants outstanding to purchase shares of the Company’s common stock:


			Exercise
	Shares		Price		Expiration
Public Warrants		689,999	$	230.00	February 2027
Private Placement Warrants		376,000		230.00	February 2027
GEM Warrants		169,896		200.00	February 2025
2023 Notes Warrants		258,775		0.20	March 2025
Total		1,494,670

Public and Private Placement Warrants

On February 13, 2021, CCAC consummated the initial public offering (“IPO”) of 1,380,000 units (the “Units”), including the full exercise by the underwriters of their over-allotment option. Each Unit included one share of Class A Common Stock and one half of one warrant (the “Public Warrants”). Simultaneously with the closing of the IPO, CCAC consummated the sale of 376,000 warrants (the “Private Placement Warrants”) in a private placement to CITIC Capital Acquisition LLC (the “Sponsor”). As of September 30, 2022, the Company had 689,999 Public Warrants that are now equity classified post Business Combination and 376,000 Private

Placement Warrants outstanding. The Private Placement Warrants, which the Company assumed as part of the Business Combination, are recorded as warrant liabilities.

Each whole Warrant entitles the registered holder to purchase one share of common stock at a price of $230.00 per share, at any time commencing on March 10, 2022, provided that the Company has an effective registration statement under the Securities Act covering the shares of the common stock issuable upon exercise of the Warrants and a current prospectus relating to them is available. The Warrants expire on February 8, 2027, or earlier upon redemption or liquidation. The Company may redeem the Public Warrants when the last reported sales price of the Company’s common stock for any 20 trading days within a 30-trading day period ending on the third trading day prior to the date on which the Company sends the notice of redemption to the warrant holders (the “Reference Value”) exceeds $360.00.

If the Reference Value exceeds $360.00, Public Warrants are redeemable at $0.20 per warrant, in whole and upon a minimum of 30 days prior written notice. The Company’s Board of Directors could also elect to require all warrant holders to exercise the Public Warrants on a cashless basis. The number of shares to be issued for the cashless exercise would be equal to the quotient obtained by dividing (x) the product of the number of shares underlying the warrants, multiplied by the excess of the fair market value over the warrant price by (y) the fair market value. The fair market value is the average reporting closing price of the shares for the ten trading days ending on the third day prior to the date on which the notice of redemption was send to warrant holders.

The Private Placement Warrants have terms and provisions that are identical to those of the Public Warrants. However, the Private Placement Warrants are not redeemable by the Company as long as they are held by a Sponsor or its permitted transferees. If the Private Placement Warrants are held by holders other than the Sponsor or its permitted transferees, the Private Placement Warrants will be redeemable by us in all redemption scenarios and exercisable by the holders on the same basis as the Public Warrants.

GEM Warrants

In December 2021, the Company issued the GEM Warrant, pursuant to the GEM Agreement, with a 36-month term to purchase 169,896 shares of common stock at a strike price per share equal to $200.00, to GEM Yield Bahamas Limited.

2023 Notes Warrants

During fiscal year 2020, the Company issued warrants to purchase 176,358 shares of the Company’s common stock with an exercise price of $0.20 per share in conjunction with the issuance of $16.1 million convertible promissory notes (the “2023 Initial Notes”). These warrants expire in March 2025.

The Company allocated the proceeds from the issuance of the 2023 Initial Notes between the convertible notes and the common stock warrants on a relative fair value basis, with approximately $7.2 million allocated to the common stock warrants, included within additional paid-in capital on the consolidated balance sheets. The warrants are not remeasured in future periods as they meet the conditions for equity classification. See “Note 12 – Borrowing Arrangements” for additional details on the 2023 Initial Notes.

In February 2021, the Company issued warrants to purchase 314,901 shares of common stock in conjunction with the issuance of $48.7 million in convertible promissory notes (the “Extension Notes”). These Extension Notes have similar terms to the 2023 Initial Notes (the “2023 Initial Notes”, together with the “Extension Notes”, referred to as the “2023 Notes”).

These warrants are exercisable for shares of common stock at $0.20 per share and expire in March 2025. The Company allocated the proceeds from the issuance of the Extension Notes between the convertible notes and the common stock warrants on a relative fair value basis, with approximately $22.0 million allocated to the common stock warrants, included within additional paid-in capital on the consolidated balance sheets. The warrants are not remeasured in future periods as they meet the conditions for equity classification. See “Note 12 – Borrowing Arrangements” for additional details on the Extension Notes.

Sensata Warrants

In June 2021, the Company issued warrants to purchase 125,000 shares of common stock of the Company in exchange for services to be provided under a Collaboration Agreement with Sensata. Upon the close of the Business Combination, the warrants were fair valued and the Company recorded $17.6 million within additional paid-in capital, with $8.8 million recorded in prepaid expenses and other current assets, and $8.8 million in other long-term assets. The warrants were subsequently exercised in May 2022 for $25 thousand in cash. The Company recognizes expense under the Collaboration Agreement as services are provided. Refer to “Note 18 – Related Party Transactions” for additional details.

(11) Stock-based Compensation Expense

2013 Equity Incentive Plan

Effective January 28, 2022, the Company increased the aggregate number of shares reserved for issuance under the 2013 Incentive Stock Plan by 75,000 shares.

2022 Equity Incentive Plan

In June 2021, the Board of Directors adopted the Quanergy Systems, Inc. 2022 Plan (“the 2022 Plan”), which was subsequently approved by the Company’s stockholders. The 2022 Plan became effective on February 8, 2022 and 679,507 shares of common stock were reserved for issuance under the 2022 Plan. The 2022 Plan permits the granting of incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock, restricted stock units, performance awards, and other equity-based awards to employees, directors and consultants.

Employee Stock Purchase Plan

The Board of Directors and stockholders approved the Quanergy Systems, Inc. 2022 Employee Stock Purchase Plan, or the ESPP, in June 2021 and January 2022, respectively. The initial number of shares of common stock authorized for sale under the ESPP was 41,706. Unless the Board of Directors provides otherwise, beginning on January 1, 2023, and continuing through and including January 1, 2032, the maximum number of shares which shall be made available for sale under the ESPP will automatically increase on the first day in January of each calendar year by the lesser of:

(1)

one percent (1%) of fully diluted Common Stock on December 31st of the preceding calendar year

(2)

shares of Common Stock equal to 200% of the initial share reserve, or

(3)

such lesser number of shares of the Company as determined by our board of directors.

As of September 30, 2022, the Employee Stock Purchase Plan has not yet been activated. The Company is currently evaluating the timing of activation.

Option Activity

The stock option activity for the nine months ended September 30, 2022 has been retrospectively adjusted to reflect the reverse stock split and Exchange Ratio on the Legacy Quanergy stock options.

The following table summarizes the stock option activity for the nine months ended September 30, 2022:


	Options outstanding
	Number of shares			Weighted average exercise price per share		Weighted average contractual term (in years)		Aggregate intrinsic value (in thousands)
Outstanding - December 31, 2021		197,637		$	138.20	5.13		$	15,398
Options granted		—			—
Options exercised		(14,741	)		5.05
Options cancelled		(5,308	)		199.37
Options expired		—			—
Outstanding at September 30, 2022		177,588		$	147.56		4.53	$	9.12
Vested and exercisable - September 30, 2022		166,418		$	140.29		4.36	$	9.12
Vested and expected to vest - September 30, 2022		177,588		$	147.56		4.53	$	9.12

As of September 30, 2022, there was $0.8 million of unrecognized compensation costs related to non-vested stock option awards, which is expected to be recognized over a weighted-average period of approximately 1.09 years.

Restricted Stock Unit Activity

The restricted stock unit activity for the nine months ended September 30, 2022 has been retrospectively adjusted to reflect the reverse stock split and Exchange Ratio on the Legacy Quanergy restricted stock units.

The following table summarizes the restricted stock unit activity for the nine months ended September 30, 2022:


	Restricted Stock Units (“RSUs”)
	Number of shares			Weighted average grant date fair value
Unvested as of December 31, 2021		565,005		$	137.94
Granted		415,210			22.11
Vested		(437,106	)		126.41
Forfeited or cancelled		(44,054	)		75.75
Unvested as of September 30, 2022		499,055		$	56.85

Vesting of RSUs are subject to service and performance conditions. The Business Combination was a qualifying event that satisfied the performance condition for all RSUs. For the three and nine months ended September 30, 2022, $3.9 million and $58.8 million, respectively, of stock-based compensation expense has been recognized on these RSUs. As of September 30, 2022, there was $24.8 million unrecognized stock-based compensation expense related to outstanding unvested RSUs, which is expected to be recognized over a weighted-average period of approximately 2.32 years.

Stock-based Compensation Expense

The following table summarizes stock-based compensation expense and its allocation within the accompanying condensed consolidated statements of operations for the three and nine months ended September 30, 2022 and 2021, respectively (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Cost of goods sold	$	179	$	16	$	1,016	$	57
Research and development		1,321		415		10,462		1,311
Sales and marketing		1,012		211		6,854		653
General and administrative		2,196		2,706		43,188		8,633
Total stock-based compensation expense	$	4,708	$	3,348	$	61,520	$	10,654

(12) Borrowing Arrangements

Convertible Notes

2022 Notes

In 2018, the Company issued an aggregate of $25.5 million in convertible promissory notes to various investors (the “2022 Notes”). The 2022 Notes were secured by a security agreement and matured in March 2022, unless earlier converted at the option of the investors.

The principal amount accrued interest at 1.5% per annum, payable biannually, with additional interest at 8.0% per annum, which was added to the principal and compounded on each payment date. Prior to maturity, the investors could elect to convert all or a portion of the outstanding principal and accrued and unpaid interest on the 2022 Notes to equity based on various conversion events.

The 2022 Notes contained an embedded derivative representing the debt conversion features and the fair value of the derivative was recorded as a liability with an offsetting amount recorded as a debt discount against the carrying value of the 2022 Notes. The debt discount was amortized to interest expense using the effective interest method over the term of the 2022 Notes. The derivative liability was re-valued at the end of each reporting period using a probability-weighted discounted cash flow model.

Changes in the estimated fair value of the debt derivative were recorded in other income (expense), net, on the accompanying condensed consolidated statements of operations. The 2022 Notes were paid off at the Closing Date. The debt derivative on the 2022 Notes was remeasured at Closing Date, then derecognized upon payoff of the 2022 Notes. The Company recognized a $0.3 million loss on extinguishment of the 2022 Notes in interest income (expense), net on the condensed consolidated statements of operations.

The estimated fair value of the 2022 Notes embedded derivative is as follows (in thousands):


	Embedded Derivative Liability
Fair value as of December 31, 2021	$	172
Change in fair value		141


Fair value prior to Closing		313
Payoff of 2022 Notes		(313	)
Fair value as of September 30, 2022	$	—

The Company incurred approximately $0.9 million of fees related to issuance of the 2022 Notes in the form of advisor fees, legal fees and other related expenses. These costs were recorded as debt discount and were amortized to interest expense using the effective interest method over the term of the 2022 Notes.

2023 Notes

In 2020, the Company issued an aggregate of $16.1 million in convertible promissory notes to various investors, which matured in March 2023 (the “2023 Initial Notes”). In 2021, the Company issued additional convertible promissory notes of $48.7 million to various investors, which also matured in March 2023 (the “Extension Notes”). The Company issued common stock warrants in conjunction with the 2023 Initial Notes and Extension Notes (together, the “2023 Notes”). See “Note 10 – Common Stock” for additional details.

The principal amount of the outstanding balance on the 2023 Notes accrued interest at 10.0% per annum, payable at maturity in March 2023. Prior to maturity, the 2023 Notes could be redeemed for an amount equal to 200% of the principal amount of the outstanding balance and the unpaid accrued interest in the event of a change in control, or converted, either voluntarily at the option of the investor or automatically to equity based on various conversion events.

In accounting for the issuance of the 2023 Notes, the Company separated the 2023 Notes into liability and equity components, consisting of embedded derivatives representing the redemption and conversion features, and common stock warrants, respectively. The fair value of the derivatives was calculated using the “with and without” method. The key valuation assumptions used consist of the discount rate and the probability of the occurrence of various conversion events. The fair value of the liability and equity components exceeded the 2023 Initial Notes gross proceeds therefore, the fair value of the components was allocated on a relative fair value basis.

At issuance of the 2023 Initial Notes, the derivative liability and common stock warrants received relative fair value allocations of $5.2 million and $7.2 million, respectively, with the offset to debt discount, and the remaining immaterial balance was recorded as a loss in other income (expense), net on the condensed consolidated statements of operations. At issuance of the Extension Notes, the fair value of the liability and equity components were $17.5 million and $22.0 million, respectively. The equity component was included in additional paid-in capital on the condensed consolidated balance sheets. The equity component was not remeasured.

The derivative liabilities were re-valued at the end of each reporting period. Changes in the estimated fair value of the derivatives were recorded in other income (expense), net, on the accompanying condensed consolidated statements of operations. The 2023 Notes were converted into shares of the Company at the Closing Date. The debt derivative on the 2023 Notes was remeasured at Closing Date, then derecognized upon conversion into equity. Upon conversion of the 2023 Notes, the Company recognized a $36.7 million loss on settlement of the 2023 Notes in interest income (expense), net in the condensed consolidated statement of operations.

The estimated fair value of the 2023 Notes embedded derivative is as follows (in thousands):


	Embedded Derivative Liability
Fair value as of December 31, 2021	$	26,017
Change in fair value		3,636
Fair value prior to Closing		29,653
Conversion of 2023 Notes		(29,653	)
Fair value as of September 30, 2022	$	—

The 2023 Notes debt issuance costs were approximately $0.4 million, consisting of advisor fees, legal fees and other related expenses. The Company allocated the total amount incurred to the liability and equity components on a relative fair value basis, resulting in $0.3 million allocated to the liability component and recorded as debt discount and approximately $0.1 million to the equity component. The residual amount was immaterial and was allocated to loss on issuance of the 2023 Notes. As such, the total loss recorded on the 2023 Notes was immaterial.

The following table represents the total amount of interest expense recognized on the 2022 Notes and 2023 Notes for the three and nine months ended September 30, 2022 and 2021 (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Contractual interest expense	$	—	$	2,422	$	1,052	$	6,545
Accretion of debt discount		—		3,406		38,757		8,093
Accretion of debt issuance costs		—		83		223		238
Total interest expense	$	—	$	5,911	$	40,032	$	14,876

(13) Leases

The Company leases real estate facilities under non-cancelable operating leases with various expiration dates through fiscal year 2024. The Company adopted Topic 842 as of January 1, 2022, using the modified retrospective approach.

In July 2022, the Company extended the lease agreement for its corporate headquarters located in Sunnyvale, CA for an additional one-year term. Either party may terminate the agreement by providing six months' notice.

At September 30, 2022, the operating lease ROU asset and lease liability balances were $1.1 million and $1.1 million, respectively. The ROU asset balance was recorded in other long-term assets and the lease liability was recorded in other current liabilities and other long-term liabilities on the condensed consolidated balance sheet.

For the three and nine months ended September 30, 2022, the Company recorded operating lease costs of $0.2 million and $0.5 million, respectively. The Company's variable lease costs were $0.1 million for the nine months ended September 30, 2022, and are generally comprised of maintenance, taxes, insurance and operating expenses not included in the measurement of the lease liability. Variable lease costs for the three months ended September 30, 2022 were not material. All lease costs are recorded in general and administrative expense and cost of goods sold on the condensed consolidated statements of operations.

The following table presents supplemental cash flow information related to leases (in thousands):


	Three Months Ended September 30, 2022		Nine Months Ended September 30, 2022
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	217	$	573
Lease assets obtained in exchange for lease obligations:
Operating leases	$	1,113	$	1,113

The following table presents the remaining cash flows of the Company’s operating lease liabilities as of September 30, 2022 (in thousands):


	Operating Leases
2022 (remaining three months)	$	305
2023		825
2024		34
Total undiscounted lease payments	$	1,164
Less: imputed interest		(45	)
Total lease liabilities	$	1,119

The following table presents the weighted average remaining lease term and interest rate as of September 30, 2022:

ASC 840 Disclosures

The Company elected the modified retrospective transition method, which applies ASC 842 as of the effective date on January 1, 2022. Prior to the adoption of ASC 842, the Company applied ASC 840 to its lease transactions.

The following table presents the future minimum lease commitments under the Company’s operating leases as of December 31, 2021, as previously disclosed (in thousands):


	Operating Leases		Lease Termination Agreement
2022	$	459	$	293
2023		4		49
Total minimum payments	$	463	$	342

Rent expense was $0.1 million and $0.5 million, respectively, for the three and nine months ended September 30, 2021.

(14) Income Taxes

The Company recorded income tax expense of zero and $6 thousand, respectively, for the three and nine months ended September 30, 2022, and income tax expense of $5 thousand and $15 thousand, respectively, for the three and nine months ended September 30, 2021. Income tax expense for all periods presented is related primarily to the Company's non-U.S. operations as its U.S. operations were in a loss position and the Company maintains a full valuation allowance against its U.S. deferred tax assets.

(15) Commitments and Contingencies

Legal Proceedings

The Company is a party to various legal proceedings and claims which arise in the ordinary course of business. The Company records a liability when it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. If the Company determines that a loss is reasonably possible and the loss or range of loss can be reasonably estimated, the Company discloses the reasonably possible loss.

In response to allegations of patent infringement and threats of litigation by one of its competitors (“Complainant”), the Company filed a complaint in the Northern District of California seeking a declaratory judgment of non-infringement of the complainant’s patent (patent # 7969558). The Complainant filed an answer and counterclaim seeking injunctions and damages for an unspecified amount. The Company answered the counterclaims asserting that the patent claims are not valid and also filed two petitions for inter parties review (“IPR”) before the Patent Trial and Appeal Board (“PTAB”), which were instituted in May 2018. All briefing and the oral hearing in the PTAB proceedings have concluded. On May 23, 2019, the PTAB issued Final Written Decisions finding all petitioned claims are not invalid. On June 24, 2019, the Company filed a Request for Rehearing in response to the Final Written Decision. On May 23, 2020, the PTAB denied the Request for Rehearing. Quanergy filed an appeal to the Court of Appeals for the Federal Circuit (“CAFC”) for each IPR (consolidated as docket no. CAFC-20-2070). Oral argument was held on July 7, 2021. On February 4, 2022, the CAFC affirmed the decision of the PTAB.

In the fourth quarter of 2020, the Company started engaging in discussions with the Complainant for a potential out of court settlement related to the ongoing legal proceeding discussed above, in order to avoid future significant legal expenses. The Company determined that it had incurred a liability as of December 31, 2020 and recorded an estimated potential loss for this case in the amount of $2.5 million at that time. During the nine months ended September 30, 2022, this amount has been increased to $2.75 million with the incremental increase recorded in general and administrative expenses on the condensed consolidated statements of operations. The Company will continue to monitor developments on this case and record any necessary adjustments to reflect the effect of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case in the period they become known. This litigation, as with any other litigation, is subject to uncertainty and an unfavorable outcome may result in a material adverse impact on the Company’s business, results of operations, financial position, and overall trends.

Vendor Contract Liability

In October 2017, the Company entered into an agreement with a contract manufacturer for production of various sub-assemblies and final assemblies of the Company’s M8 and S3 product lines. The contract manufacturer procures parts to fulfill the forecasted demand of the Company, holding title and risk of loss to the inventory.

The terms of the agreement specify that the Company may be liable for this inventory should it not place orders for units sufficient to consume this inventory, or in varying amounts based on the termination of the agreement at any time by either party. The contract manufacturer holds $1.6 million of inventory at cost subject to this agreement as of September 30, 2022 and December 31, 2021. The Company has recorded a liability of $0.3 million within accrued expenses on the condensed consolidated balance sheet as of September 30, 2022 and December 31, 2021 for inventory at the contract manufacturer identified as excess and obsolete.

The Company is in process of transitioning its manufacturing requirements to another provider and is currently winding down its remaining obligations related to this agreement. The Company expects that the transition process will continue into 2023.

Employee Retention Plan

The Company adopted an employee retention plan (“Retention Plan”) in 2019, which was subsequently amended and restated in April 2021. Key employees as determined by the Board of Directors are eligible to participate in the Retention Plan, and have the right to payment of a retention bonus upon the occurrence of a covered transaction, defined as a change in control, IPO or a SPAC merger transaction. The retention bonus is expected to be paid out in equal installments, at the first and second anniversary of the occurrence of the covered transaction, and the employee will have to be actively employed by the Company at the time of payment. The Business Combination qualifies as a covered transaction, and at Closing, the amount of retention bonus totaled $4.6 million. The Company may incur incremental obligations as new employees are hired and trues up its obligation on actual exits from employment. No forfeitures have been estimated, and at September 30, 2022, the retention bonus totaled $4.6 million.

The Company recognizes the expense of the retention bonus as services are received on a pro-rata basis over the passage of time from the date of Closing of the Business Combination until expected payment dates. As of September 30, 2022, the Company has accrued $2.2 million of retention bonus expense, with $1.4 million recorded in accrued expenses and $0.8 million in other long-term liabilities on the condensed consolidated balance sheets. For the three months ended September 30, 2022, the Company recorded retention bonus expense of $0.8 million in operating expenses on the condensed consolidated statements of operations. For the nine months ended September 30, 2022, the Company recorded retention bonus expense of $2.1 million in operating expenses and $0.1 million in cost of goods sold on the condensed consolidated statements of operations.

(16) Segment Information and Geographic Information

The Company conducts its business in one operating segment that designs, develops and produces LiDAR sensors used in intelligent real-time 3D object detection and classification solutions. The Company’s Chief Executive Officer (“CEO”) is the Chief Operating Decision Maker (“CODM”). The CODM allocates resources and makes operating decisions based on financial information presented on a consolidated basis. The profitability of the Company’s product group is not a determining factor in allocating resources and the CODM does not evaluate profitability below the level of the consolidated company.

Revenue by geographical region is as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Americas	$	1,775	$	308	$	2,572	$	604
Asia		379		684		1,511		1,475
Europe, Middle East and Africa		170		145		797		346
Total net sales	$	2,324	$	1,137	$	4,880	$	2,425

All long-lived assets are maintained in, and all losses are attributable to, the United States of America.

(17) Net Loss Per Share

The unaudited basic and diluted net loss per share for the three and nine months ended September 30, 2021 has been computed to give effect to the conversion of shares of Legacy Quanergy convertible preferred stock into shares of Legacy Quanergy common stock as though the conversion had occurred as of the beginning of the period. Shares of the Company’s common stock reflect the reverse stock split and the Exchange Ratio as though the conversion had occurred as of the beginning of the period.

The following table sets forth the computation of the basic and diluted net loss per share attributable to common stockholders for the three and nine months ended September 30, 2022 and 2021, respectively (in thousands, except share and per share data):


	Three Months Ended September 30,		Nine Months Ended September 30,
	2022	2021	2022	2021
Numerator:


Net loss attributable to common stockholder, basic and diluted	$	(17,652	)	$	(18,999	)	$	(148,008	)	$	(54,180	)
Denominator:
Weighted average shares of common stock outstanding, basic and diluted		6,824,212			3,463,403			5,793,554			3,320,498
Net loss per share attributable to common stockholder, basic and diluted	$	(2.59	)	$	(5.49	)	$	(25.55	)	$	(16.32	)

Since the Company was in a loss position for all periods presented, basic net loss per share is the same as diluted net loss per share for all periods as the inclusion of all potential common shares outstanding would be anti-dilutive.

The following table presents the potential common shares outstanding that were excluded from the computation of diluted net loss per share of common stock as of the periods presented because including them would be anti-dilutive:


	As of September 30,
	2022		2021
Public warrants		689,999		—
Private placement warrants		376,000		—
GEM warrants		169,896		—
Stock options and RSUs issued and outstanding		676,643		719,502
Convertible notes		—		196,733
Potential common shares excluded from diluted net loss per share		1,912,538		916,235

(18) Related Party Transactions

Related Party Collaboration Agreement

To support the Company’s path towards automotive grade solid state LiDAR sensors, help de-risk the ramp towards high volume manufacturing, and improve the Company’s marketing and distribution capabilities, the Company entered into a Strategic Partnership Agreement (“Collaborative Agreement”) with Sensata Technology, Inc (“Sensata”) on February 8, 2016. As part of the Collaborative Agreement, Sensata made a $50 million investment in the initial closing of the Company’s offering of Series B convertible preferred stock. The agreement committed both companies to engage in joint development and commercialization of the solid-state product for the transportation segment. The Company is expected to retain ultimate discretion relating to product roadmap and development, with Sensata retaining ultimate control over the manufacturing, sales and marketing decisions subject to certain terms and conditions.

On March 29, 2020, Quanergy and Sensata signed an amendment to the agreement which eliminated exclusivity for the transportation sector, reduced specific development and commercialization obligations and added flexibility to the manufacturing model.

No revenues on the February 2016 Collaborative Agreement have been recognized for the three and nine months ended September 30, 2022 and 2021. In accordance with the Collaborative Agreement, the Company purchased equipment from Sensata totaling $1.0 million which is included in the accompanying condensed consolidated balance sheets as of September 30, 2022 and December 31, 2021. For the three and nine months ended September 30, 2022 and 2021, depreciation expense on this equipment was not material.

On June 21, 2021, the Company entered into another collaborative arrangement with Sensata for a term of four years, wherein Sensata will provide consulting services with respect to areas of manufacturing, cost reduction, sourcing, and go to market strategies. In exchange for such services, the Company issued a warrant to Sensata to purchase 125,000 shares of the Company. These warrants had a fair value of $23.3 million at December 31, 2021. On the Closing Date, these warrants were fair valued at $17.6 million. No revenues have been recognized under this collaborative agreement since inception. $0.2 million in expenses have been incurred under this collaborative arrangement for the nine months ended September 30, 2022. No expenses were incurred for the three months ended September 30, 2022. Either party may terminate the collaboration agreement after two years by providing a 30 day notice.

Related Party Convertible Notes

In 2020 and 2021, the Company issued convertible promissory notes of approximately $64.8 million to various investors, out of which $27.2 million was issued to four related parties. The related party debt is presented as “Long-term debt – related party” in the consolidated balance sheet, adjusted for deferred interest, allocated debt financing costs and derivative liability recorded as debt discount on the 2023 Notes. The principal amount of the outstanding balance accrued interest at 10.0% per annum, payable at maturity in March 2023. The Company also issued 245,043 common stock warrants to the four related parties in conjunction with the issuance of the 2023 Notes. The 2023 Notes were converted into equity of the Company on the Closing Date.

For the three months ended September 30, 2022 and 2021, the Company accrued interest of $0.0 and $2.3 million, respectively, for related party debt. For the nine months ended September 30, 2022 and 2021, the Company accrued interest of $1.7 million and $6.1 million, respectively, for related party debt. See “Note 12 – Borrowing Arrangements” for additional details.

Related Party Restricted Stock Units

Out of the total RSU grants in 2021, 148,186 were issued to two related parties with an aggregate fair value of $20.1 million. Of the total RSU grants in 2022, 257,484 were issued to fourteen related parties with an aggregate fair value of $4.1 million. On the Closing Date, both the performance-based and service-based conditions for vesting of the RSU grants had been satisfied, therefore, $2.3 million and $24.9 million in expenses has been recognized on these awards in the three and nine months ended September 30, 2022, respectively.

Related Party Private Placement Warrants

An aggregate of 329,000 Private Placement Warrants are held by a related party. Each Private Placement Warrant is exercisable to purchase one share of common stock at a price of $230.00 per share.

Related Party Payable

On March 31, 2022, the Company issued 43,150 shares of common stock to reimburse a related party for merger-related expenses of $1.7 million. As of September 30, 2022, the remaining amount due to the related party was $1.1 million for merger related expenses paid by the related party on behalf of the Company.

Related Party Common Stock

As of September 30, 2022, a related party owns 301,875 shares of the Company wherein these shares are subject to a lock up period, which is set to end at the earlier of, (a) a year after the Closing Date or, (b) subsequent to the Closing Date, (x) if the closing price of the common stock equals or exceeds $240.00 per share for any 20 trading days within any 30-trading day period commencing at least 150 days after the Closing Date, or (y) the date the Company completes a liquidation, merger, share exchange or other similar transaction after the Business Combination, that results in all of the Company’s public shareholders having the right to exchange their shares for cash, securities or other property.

(19) Subsequent Events

Subsequent events have been evaluated through the November 14, 2022 issuance date of the financial statements and there were no events that would materially impact the consolidated financial statement disclosures, except for the following:

Settlement of GEM Drawdown

On October 3, 2022, the Company settled the second draw on the GEM Agreement and received $1.7 million in cash and 280,000 shares were returned to the Company.

Corporate Restructuring

The Company implemented a restructuring plan on October 3, 2022 after an extensive review of its organization and programs and in response to current market conditions. In connection with this restructuring plan the Company reduced staff by 11%, from 141 to 126 full-time employees, pursuant to which it expects to incur severance expenses of approximately $130 thousand. The Company expects to substantially complete this workforce reduction by the end of December 2022.

Reverse Stock Split

On October 6, 2022, the Company effected a 1-for-20 reverse stock split of its Common Stock. The accompanying condensed consolidated financial statements and footnotes retroactively reflect the impact of this reverse stock split on the Company’s Common Stock and per share amounts.

Underwritten Public Offering

On October 30, 2022, the Company entered into an Underwriting Agreement (the “Underwriting Agreement”) with Maxim Group LLC (the “Underwriter”), pursuant to which the Company agreed to issue and sell, in a registered public offering, (the “Public Offering”), 9,800,000 Units, with each Unit consisting of one share of Common Stock and two warrants with a term of five years (each, a “Unit Warrant”) to purchase one share of Common Stock at an exercise price per share of $1.70, with each Unit to be offered to the public at an offering price of $1.70 per Unit (the “Units”).

In addition, pursuant to the Underwriting Agreement, the Company granted the Underwriter a 30-day option (the “Overallotment Option”) to purchase up to (i) 1,470,000 additional shares of Common Stock and/or (ii) 2,940,000 additional warrants, solely to cover over-allotments. The Underwriter partially exercised the Overallotment Option on October 31, 2022 to purchase 2,940,000 additional warrants to purchase up to 2,940,000 shares of Common Stock (the “Option Warrants”). The Company also issued warrants to the Underwriter to purchase up to a total of 392,000 shares of Common Stock (equal to 4.0% of the total number of Units sold in the offering) (the “Underwriter’s Warrants”). The Underwriter’s Warrants are exercisable at a per share price of $1.87 on April 28, 2023 and will expire on the five-year anniversary of such date.

On November 2, 2022, the Public Offering closed for gross proceeds of $16.7 million, and the Company issued and sold (i) 9,800,000 Units consisting of (a) 9,800,000 shares of Common Stock, and (b) 19,800,000 Unit Warrants, and (ii) an additional 2,940,000 Option Warrants. Net proceeds to the Company, after deducting the underwriting discounts and commissions and estimated offering expenses payable by the Company, were approximately $15.4 million.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of Quanergy’s results of operations and financial condition should be read in conjunction with the information set forth in the financial statements and the notes thereto included elsewhere in this Form 10-Q. This discussion may contain forward-looking statements based upon Quanergy’s current expectations, estimates, and projections that involve risks and uncertainties. Actual results could differ materially from those anticipated in these forward-looking statements due to, among other considerations, the matters discussed under “Risk Factors.” Unless the context otherwise requires, all references in this section to “we,” “our,” “us” “the Company” or “Quanergy” refer to the business of Quanergy Systems, Inc., a Delaware corporation, and its subsidiaries.

Overview

We design, develop and produce Light Detection and Ranging (“LiDAR”) sensors and are a leader in 3D sensing that delivers robust and intelligent real-time 3D object detection and classification solutions.

Currently, our applications and products are targeted towards four key market groups: 1) the Security market where we build applications leveraging the mechanical M Series LiDAR combined with proprietary software for perimeter security and intrusion detection applications; 2) the Smart Cities / Spaces market, where our flow management tools are used in cities and municipalities to improve the movement and safety of their citizens in dense urban settings; 3) the Industrial market, where we are launching new LiDAR solutions for material handling, logistics, and measurement; and 4) the Transportation market which consists of passenger vehicles as well as heavy vehicles and off highway applications such as agricultural and mining equipment, which we are primarily looking to service through our solid state development activities for use in Advanced Driver Assist Systems as well as in highly automated vehicle applications.

We generate revenue primarily by entering into supply arrangements with systems integrators, value added resellers, distributors and end customers. We have also, in the past, received funds from evaluation agreements, where a customer obtains early access to technology through evaluation samples of products and related software.

To date, we have financed our operations primarily through private placements of convertible preferred stock and issuance of convertible notes. From the date of our incorporation through September 30, 2022, we have raised, in the aggregate, net proceeds of approximately $298 million, including approximately $154 million from the issuance of convertible preferred stock, approximately $90 million from the issuance of convertible notes, approximately $44 million of net proceeds from the Business Combination and approximately $10 million from draw downs of the share subscription facility with Global Emerging Markets Group (“GEM”), a Luxembourg-based private alternative investment group. In the year ended December 31, 2021 and nine months ended September 30, 2022, we incurred a net loss of $63.5 million and $148.0 million, respectively, and used $30.1 million and $45.0 million, respectively, in cash to fund our operations. We have an accumulated deficit of $455.6 million as of September 30, 2022.

Over the last two years, key changes to our R&D and product development organizations have accelerated the pace of product releases. In the year ended December 31, 2020, we released 10 new solutions (four sensors, four software products, and two VMS integrations). In the year ended December 31, 2021, we released 10 new solutions (two sensors and eight software products). During the nine months ended September 30, 2022, we released five new solutions (one sensor and four software products). We expect to continue investing in R&D and product development to further support sales growth going forward.

The years ended December 31, 2021 and 2020 were also critical years for the development of our S3 platform. After receiving new hardware at the end of 2019, we devoted much of the years ended December 31, 2021 and 2020 to a testing and optimization program

that increased the outdoor range of our sensors from 20 meters in January 2020 to 100 meters by January 2021 and to 250 meters presently.

COVID-19 impact

Our financial results and operations continue to be impacted by the novel coronavirus (“COVID-19”) that began during 2020. The ongoing pandemic has resulted in significant disruptions to global economies, supply chains, distribution networks, the rate of inflation and consumer behavior around the world.

We have experienced unfavorable impacts to our financial results and operations since the pandemic began primarily due to the delay of projects and slowing overall business activity, as well as, in certain cases, the inability to physically access customer sites. Despite these setbacks, we reacted quickly to help offset the negative cash flow impacts of these factors with key elements of our cash preservation plan in 2020 including employee furloughs, negotiating extended payment terms with vendors, cutting wages and reducing overall external contractor spending. We also benefited from a $2.5 million Paycheck Protection Program (“PPP”) loan from the Small Business Administration available under the CARES Act enacted for COVID-19 relief. We continue to maintain a cautious pace of spending on core operating activities and have been impacted by large transaction related expenses such as elevated legal and accounting fees and public company insurance costs since becoming a public entity.

While business conditions improved significantly year-over-year, over the last six quarters, broader implications of the COVID-19 pandemic were present throughout the year on our workforce, operations, supply chain and customer demand. For the third quarter ended September 30, 2022, we saw improving demand conditions and supply chain dynamics which supported year-over-year growth in the security, smart spaces and industrial markets. For the remainder of 2022 and into 2023, we envision significant uncertainties remaining, including those related to disruptions from COVID-19, broad based supply chain shortages and geopolitical risks related to the events in Ukraine.

Comparability of financial information

Our results of operations and statements of assets and liabilities may not be comparable between periods as a result of the Business Combination (as defined below).

Business Combination and public company costs

On February 8, 2022 (the “Closing Date”), subsequent to the end of the fiscal year ended December 31, 2021, the fiscal year to which this management’s discussion and analysis of financial condition and results of operations relates, Quanergy Systems, Inc. (when referred to in its pre-Business Combination (as defined below) capacity, “Legacy Quanergy”), a Delaware corporation (f/k/a CITIC Capital Acquisition Corp. (“CCAC”)), consummated the previously announced merger (the “Closing”) pursuant to that certain Agreement and Plan of Merger, dated June 21, 2021, as amended on June 28, 2021, November 14, 2021 and December 26, 2021 (the “Merger Agreement”), by and among CCAC, CITIC Capital Merger Sub Inc., a Delaware corporation and direct wholly owned subsidiary of CCAC (“Merger Sub”) and Legacy Quanergy. CCAC’s shareholders approved the Business Combination (the “Business Combination”) and the change of CCAC’s jurisdiction of incorporation from the Cayman Islands to the State of Delaware by deregistering as an exempted company in the Cayman Islands and domesticating and continuing as a corporation formed under the laws of the State of Delaware (the “Domestication”) at an extraordinary general meeting of stockholders held on January 31, 2022.

On February 7, 2022, one business day prior to the Closing Date, CCAC effectuated the Domestication, pursuant to which each of CCAC’s currently issued and outstanding Class A ordinary shares and Class B ordinary shares automatically converted by operation of law, on a one-for-one basis, into shares of our common stock (“Common Stock”). Similarly, all of CCAC’s outstanding warrants became warrants to acquire shares of Common Stock, and no other changes were made to the terms of any outstanding warrants.

Pursuant to the terms of the Merger Agreement, the Business Combination was effected through the merger (the “Merger”) of Merger Sub with and into Legacy Quanergy, whereupon the separate corporate existence of Merger Sub ceased and Quanergy became the surviving company and a wholly owned subsidiary of CCAC. In connection with the Domestication, CCAC changed its name from CITIC Capital Acquisition Corp. to Quanergy Systems, Inc.

In addition, on the Closing Date, purchasers subscribed to purchase an aggregate of 184,750 shares of our Common Stock (the “PIPE Shares”), for a purchase price of $200.00 per share and an aggregate purchase price of $36,950,000, pursuant to separate subscription agreements. The sale of PIPE Shares was consummated substantially concurrently with the Closing.

The Business Combination was accounted for as a reverse recapitalization. Under this method of accounting, CCAC is treated as the acquired company for financial statement reporting purposes. As a result of the Merger, the most significant change in our financial

position and results are an increase in cash of $8.8 million, including approximately $37.0 million in gross proceeds from the sale of PIPE Shares and net of $35.0 million of indebtedness that was repaid at close of the Business Combination.

As a consequence of the Merger, we have become the successor to a Securities and Exchange Commission (“SEC”) registered and listed company under the ticker “QNGY” with the New York Stock Exchange, which will require us to hire additional personnel and implement ongoing procedures and processes to address public company regulatory requirements and customary practices.

Recent developments

Notice of failure to satisfy continued listing rules

On November 8, 2022, we received a letter from the staff of NYSE Regulation notifying us that it had determined to commence proceedings to delist our Common Stock (NYSE:QNGY) and warrants to purchase Common Stock (NYSE:QNGY WS) from the New York Stock Exchange (“NYSE”). Trading in these securities was suspended after the market close on the NYSE on November 8, 2022. The NYSE Regulation reached its decision to delist these securities pursuant to Section 802.01B of the NYSE’s Listed Company Manual because we had fallen below the NYSE’s continued listing standard requiring listed companies to maintain an average global market capitalization over a consecutive 30 trading day period of at least $15,000,000. The Company intends to appeal the delisting determination.

On November 9, 2022, our Common Stock and warrants began trading in the over-the-counter (“OTC”) market.

Pending the outcome of our intended appeal of the NYSE delisting determination, we intend to apply to have our Common Stock quoted on the OTCQB, a higher market tier operated by the OTC Markets Group, Inc. We may also apply to have the warrants quoted on the OTCQB, if eligible. We will continue to make all required filings with the SEC and remain subject to all SEC rules and regulations applicable to reporting companies under the Securities Exchange Act of 1934, as amended. See “Risk Factors—Our Common Stock and public warrants have been suspended from trading on and may be delisted from the NYSE and are not listed on any other national securities exchange” for additional information.

Reverse Stock Split

On October 6, 2022, we filed a Certificate of Amendment to our Certificate of Incorporation, or the Amendment, with the Secretary of State of the State of Delaware to effect a one-for-twenty (1-for-20) reverse stock split of our outstanding Common Stock. The Amendment became effective at 4:01 p.m. Eastern Time on October 6, 2022.

Pursuant to the Amendment, every 20 shares of our issued and outstanding Common Stock were automatically combined into one issued and outstanding share of Common Stock, without any change in par value per share. The reverse stock split effected all shares of our Common Stock outstanding immediately prior to the effective time of the Amendment. As a result of the reverse stock split, proportionate adjustments have been made to the per share exercise price and/or the number of shares issuable upon the exercise or vesting of all stock options, restricted share unit award and performance unit award issued by us and outstanding immediately prior to the effective time of the Amendment, which resulted in a proportionate decrease in the number of shares of our Common Stock reserved for issuance upon exercise or vesting of such stock options, restricted share unit award and performance unit award, and, in the case of stock options, a proportionate increase in the exercise price of all such stock options. In addition, the number of shares reserved for issuance under our equity compensation plans immediately prior to the effective time of the Amendment was reduced proportionately.

No fractional shares were issued as a result of the reverse stock split. Stockholders of record who would otherwise be entitled to receive a fractional share received a cash payment in lieu thereof. The reverse stock split affected all stockholders proportionately and did not affect any stockholder’s percentage ownership of our Common Stock (except to the extent that the reverse stock split results in any stockholder owning only a fractional share).

Our Common Stock began trading on the NYSE on a split-adjusted basis when the market opened on Friday, October 7, 2022. The new CUSIP number for our Common Stock following the reverse stock split is 74764U203.

All information presented in this Quarterly Report on Form 10-Q, unless otherwise indicated herein, gives effect to the 1-for-20 reverse stock split of our outstanding shares of Common Stock.

Second GEM Drawdown

On August 17, 2022, we delivered a draw down notice (the “Draw Down Notice”) to GEM Global Yield LLC SCS (“GEM Investor”), pursuant to the previously announced Share Purchase Agreement, dated December 12, 2021, by and among the Company, GEM

Investor and GEM Yield Bahamas Ltd. (“GYBL”), as amended by Amendment No. 1 to Share Purchase Agreement, dated January 31, 2022, between the Company, GEM Investor and GYBL (the “Purchase Agreement”), which allows us to fund general corporate purpose and working capital needs. On October 3, 2022, we settled the Draw Down Notice with GEM Investor. In total, we issued 320,000 shares (the “GEM Shares”) of Common Stock for an aggregate purchase price of $1,728,504, pursuant to the Draw Down Notice. Pursuant to the Purchase Agreement, we paid GEM Investor $34,570, in connection with the settlement, as partial payment of the Commitment Fee (as defined in the Purchase Agreement).

All of the GEM Shares were issued without registration under the Securities Act of 1933, as amended (the “Securities Act”), in reliance upon the exemption provided in Section 4(a)(2) of the Securities Act.

Corporate Restructuring

Due to market conditions and after an extensive review of our organization and programs, on October 3, 2022, we implemented a restructuring plan, including a reduction in staff. Under the restructuring program, we have focused our solid state engineering resources on the design of a second-generation, high-resolution OPA architecture, and we have ceased development of our initial solid state OPA architecture, resulting in a reduction in our engineering staff and associated expenditures. In connection with this restructuring plan we have reduced staff by 11%, from 141 to 126 full-time employees, pursuant to which we expect to incur severance expenses of approximately $130 thousand. We expect to substantially complete this workforce reduction by the end of December 2022. These actions are expected to reduce our expenses and extend our cash runway.

Underwritten Public Offering

On October 30, 2022, we entered into an Underwriting Agreement (the “Underwriting Agreement”) with Maxim Group LLC (the “Underwriter”), pursuant to which we agreed to issue and sell, in a registered public offering (the “Public Offering”), 9,800,000 Units, with each Unit consisting of one share of Common Stock and two warrants with a term of five years (each, a “Unit Warrant”) to purchase one share of Common Stock at an exercise price per share of $1.70, with each Unit to be offered to the public at an offering price of $1.70 per Unit (the “Units”).

In addition, pursuant to the Underwriting Agreement, we granted the Underwriter a 30-day option (the “Overallotment Option”) to purchase up to (i) 1,470,000 additional shares of Common Stock and/or (ii) 2,940,000 additional warrants, solely to cover over-allotments. The Underwriter partially exercised the Overallotment Option on October 31, 2022 to purchase 2,940,000 additional warrants to purchase up to 2,940,000 shares of Common Stock (the “Option Warrants” and, together with the Unit Warrants, the “Warrants”). On November 2, 2022, the Public Offering closed, and we issued and sold (i) 9,800,000 Units consisting of (a) 9,800,000 shares of Common Stock, and (b) 19,800,000 Unit Warrants, and (ii) an additional 2,940,000 Option Warrants. The net proceeds from the Public Offering, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us, were approximately $15.4 million.

In addition, pursuant to the Underwriting Agreement, we also issued to the Underwriter warrants to purchase up to a total of 392,000 shares of Common Stock (equal to 4.0% of the total number of Units sold in the offering) (the “Underwriter’s Warrants”). The Underwriter’s Warrants are exercisable at a per share price of $1.87 on April 28, 2023 and will expire on the five-year anniversary of such date.

Factors affecting our performance

Pricing, product costs and margins

Our pricing and margins will depend on the volumes and the features as well as specific market applications of the solutions we provide to our customers. To date, most of our revenue has been generated from flow management solutions which entail M Series sensors paired with our Qortex software for Smart City, Smart Spaces and Security applications. As we expand further into the industrial market, we expect prices to generally decrease as these products are adopted into higher volume programs with higher price sensitivity and in many cases less complex performance requirements. This downward trend in Average Selling Prices is expected to continue over time as we incorporate orders from the transportation market where cost pressures can be significant. As an offset to these pressures, we expected to benefit from improved fixed cost absorption as revenues scale and we are able to amortize fixed costs among more units, and improved variable costs from scale and redesign opportunities. Through both of these we expect to be able to keep costs down ahead of potential future price decreases which is accretive to margins. Our ability to compete in key markets will depend on the success of our efforts to efficiently and reliably produce cost-effective smart vision solutions for our commercial-stage customers. We anticipate that our process will vary by market and application due to market-specific product and commercial requirements, supply and demand dynamics and product lifecycles.

Commercialization of LiDAR based applications

We believe the LiDAR market today represents a sizable opportunity, and we see significant growth in the total addressable market across multiple end markets. We also believe we are well-positioned to take advantage of this opportunity, with strong customer relationships and differentiated products that give us opportunities across many different use cases. With that said, we expect that our results of operations, including revenue and gross margins, will fluctuate on a quarterly basis for the foreseeable future as our results are significantly impacted by the timing of individual projects, customer adoption, and overall sales cycles within each vertical. As more customers reach the commercialization phase and as the market for LiDAR solutions matures, these fluctuations in our operating results may become less pronounced. However, in the near term, our revenue may not grow as we expect until more customers commercialize their products.

End market concentration

Until now, the majority of our revenue has come from flow management applications which make up 83% and 78% of our revenue for the three and nine months ended September 30, 2022, respectively, with the balance of revenues being from various other sources. This is because we have had these solutions in market for some time and have been able to digest customer feedback and improve the products to optimize their performance for these use cases. We believe our entry into new markets will continue to facilitate revenue growth and customer diversification. While we will continue to expand the end markets we serve, we anticipate that sales to a limited number of end markets will continue to account for a significant portion of our total revenue for the foreseeable future. Our end market concentration may cause our financial performance to fluctuate significantly from period to period based on the success or failure of the markets in which we compete. Success in an end market, or commercialization, is uncertain and may develop differently in each case, with unique pricing, volume, and cost dynamics. Additionally, as production scales in order to meet the demands of commercialization, pricing pressure typically increases, and the amount of that pressure is expected to vary by market.

Sales volume

Sales volumes for our solutions can vary significantly by customer. This can depend on several factors, including the reputation of the end customer, market penetration, product capabilities, size of the end market that the product addresses and our end customers’ ability to sell their products. In addition to end market demand, sales volumes can also depend on the stage of development, with significantly higher volumes being typically associated with the production phase vs development phase. Our business can be significantly impacted by our ability to estimate these customer commitments and select projects that will successfully transition from development to production.

Continued investment and innovation

Our financial performance is significantly dependent on our ability to build on our position in the LiDAR market. This is dependent on the investments we make in research and development. It is essential that we continually identify and respond to rapidly evolving customer requirements, develop, and introduce innovative new products, enhance and service existing products and generate active market demand for our products. If we fail to do this, our leading market position and revenue may be adversely affected, and our investments in that area may not be recovered.

Market trends and uncertainties

We believe our business prospects are supported by favorable market trends that are likely to support growth in the LiDAR market over the next several years. We see the largest near-term growth opportunities coming from the Internet of Things (“IoT”) markets which encompass flow management and the industrial market. In the shorter term we see the largest pipeline of opportunities at Quanergy coming from flow management solutions driven by increased demand from smart city, smart spaces, and security applications for managing human and vehicle movements in densely populated environments. We also expect a rapidly increasing opportunity from the industrial market driven by increasing levels of automation for manufacturing, material handling and logistics. We believe that the transportation market represents a significant opportunity over time as auto original equipment manufacturers' (“OEMs”) shift from driver assist systems to increasing levels of automation, responding to consumer demands for increased safety and convenience. While the technology for significant automation at low volumes exists today, we believe high volume production of highly automated vehicles with LiDAR sensors is several years away as systems still need to see improvements in cost and performance. Our expectation is that some large volume LiDAR based programs will start to see deployment mid-decade with significant industry growth thereafter.

Although increasing adoption of LiDAR technology may generate higher demand, we may not be able to take advantage of demand if we are unable to anticipate customer needs quickly enough. The LiDAR industry is competitive with many well-funded new entrants, so we will need to build on our positioning with robust investment in new product to increase market acceptance of our LiDAR technology.

Margin improvements

Our product costs and gross margins will depend largely on the volumes of the solutions we provide to our customers. Our ability to compete in our target markets will depend on the success of our digital LiDAR solutions and the ultimate volume of our sensors sold. We anticipate that our selling process will vary by target end market and application due to market-specific supply and demand dynamics. We expect these customer-specific selling price fluctuations combined with our volume-driven product costs may drive fluctuations in revenue and gross margins on a quarterly basis. However, we expect that volume-driven product cost improvements will lead to a gross margin improvement as our sales volume increases over time.

Non-GAAP financial measures

We consider adjusted EBITDA to be an important non-GAAP financial measure because it helps illustrate underlying trends in our business and our historical operating performance on a more consistent basis. We believe that the use of adjusted EBITDA is helpful to our investors as it is a metric used by management in assessing the health of our business and our operating performance.

However, non-GAAP financial information is presented for supplemental informational purposes only, has limitations as an analytical tool and should not be considered in isolation or as a substitute for financial information presented in accordance with GAAP. In addition, other companies, including companies in our industry, may calculate similarly titled non-GAAP measures differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of our non-GAAP financial measures as tools for comparison. A reconciliation is provided below for the non-GAAP financial measure to the most directly comparable financial measure stated in accordance with GAAP. Investors are encouraged to review the related GAAP financial measure and the reconciliation of this non-GAAP financial measure to its most directly comparable GAAP financial measure, and not to rely on any single financial measure to evaluate our business.

Adjusted EBITDA

Adjusted EBITDA is a key performance measure that our management uses to assess our operating performance. Because adjusted EBITDA facilitates internal comparisons of our historical operating performance on a more consistent basis, we use this measure for business planning purposes. We define adjusted EBITDA as net loss before depreciation and amortization, provision for income taxes, interest expense (net), non-cash gain or loss on debt transactions, certain non-recurring gains and losses and any extraordinary, unusual or non-recurring charges, expenses or losses, restructuring costs, stock-based compensation and change in fair value of derivative instruments.

Our adjusted EBITDA may not be comparable to similarly titled measures of other companies because they may not calculate adjusted EBITDA in the same manner as we calculate the measure, limiting its usefulness as a comparative measure. Our presentation of adjusted EBITDA should not be construed as an inference that our future results will be unaffected by these expenses or any unusual or non-recurring items. When evaluating our performance, you should consider adjusted EBITDA alongside other financial performance measures, including our net loss and other GAAP results.

The following table reconciles net loss to adjusted EBITDA for the three and nine months ended September 30, 2022 and 2021:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2022			2021			2022			2021
	($ in thousands)						($ in thousands)
Adjusted EBITDA
Net loss	$	(17,652	)	$	(18,999	)	$	(148,008	)	$	(54,180	)
Stock-based compensation expense		4,708			3,348			61,520			10,654
Depreciation and amortization		225			230			697			720
Interest expense		25			5,912			40,096			14,876
Interest income		(59	)		(1	)		(76	)		(4	)
Change in fair value of derivatives		438			3,417			10,420			10,916
Gain on forgiveness of debt		—			—			—			(2,515	)
Income tax provision		—			5			6			15
Adjusted EBITDA	$	(12,315	)	$	(6,088	)	$	(35,345	)	$	(19,518	)

Some of the limitations of adjusted EBITDA include (i) adjusted EBITDA does not properly reflect capital commitments to be paid in the future, and (ii) although depreciation and amortization are non-cash charges, the underlying assets may need to be replaced and adjusted EBITDA does not reflect these capital expenditures. In evaluating adjusted EBITDA, you should be aware that in the future we may incur expenses similar to the adjustments in this presentation.

Basis of presentation

Quanergy currently conducts its business through a single operating segment. Substantially all our long-lived assets are maintained in, and our losses are attributable to, the United States of America. See “Note 1—Basis of Presentation and Summary of Significant Accounting Policies” and “Note 16—Segment Information and Geographic Information” in our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report for more information on basis of presentation and operating segment, respectively.

Components of Results of Operations

Net Sales

We generate revenue primarily by entering into standard supply arrangements with systems integrators, value added resellers, distributors, and end users. These end-customers and channel partners typically bundle Qortex perception software with a perpetual or term license, and/or services related to the support of the software and hardware and/or installation services. We also have instances of standalone sales of sensors and hardware equipment to customers.

Standard Supply Arrangements

Revenue is recognized for the amount that reflects the consideration we are expected to be entitled to receive based on when control of the promised product or service is transferred to the customer. Product revenue is typically recognized at time of shipment, while maintenance and support revenue is recognized ratably over the term of the support period. Certain of our arrangements are multiple-element arrangements with a combination of product and service.

We mostly use Distributors and System Integrators (“SIs”) to complement our direct sales and marketing efforts. The Distributors and SIs receive business terms of sale similar to those received by our direct customers, and payment to us is not contingent on the receipt of payment from the end customer. The Distributors and SIs negotiate pricing with the customer and are responsible for certain support levels directly with the customer.

Cost of Goods Sold

Cost of goods sold includes actual cost of material, labor, and manufacturing overhead, including depreciation and amortization, incurred for revenue- producing units shipped and includes associated warranty costs and other costs. Cost of goods sold also includes employee-related costs, including salaries, bonuses, stock-based compensation expense and employee benefit costs associated with the manufacturing of our LiDAR sensors. We expect cost of goods sold to increase in absolute dollars in future periods along with our revenue levels.

Gross Profit and Gross Margin

Our gross profit represents net sales less our total costs of goods sold, and our gross margin is our gross profit expressed as a percentage of our total revenues. We expect that gross profit and gross margin will continue to be affected by various factors including our pricing, volumes, and amount of investment to maintain or expand our sensors and sensing solutions, excess and obsolete inventories, cost structure for manufacturing operations, product support obligations, share-based compensation expenses, as well as allocated overhead. We expect our gross profit and gross margins to improve over the long term, although it varies by product and could fluctuate from period to period depending on the factors described above.

Operating Expenses

Operating expenses consist of research and development, sales and marketing, and general and administrative expenses. Personnel-related costs are the most significant component of our operating expenses and include salaries, benefits and stock-based compensation expenses. Our full-time employee headcount within these categories of operating expenses decreased slightly from 110 to 108 for the three months ended September 30, 2022. The Company anticipates further reductions in headcount in these categories related to implementation of the announced restructuring plan expected to be substantially completed by the end of December 2022.

We expect to continue to invest substantial resources to support our growth and anticipate that each of the following categories of operating expenses will increase in absolute dollar amounts for the foreseeable future.

Research and Development Expenses

Research and development expenses consist primarily of personnel-related costs directly associated with our research and development organization. These expenses also include non-personnel costs such as professional fees payable to third parties, license and subscription fees for development tools, pre-production product related costs including wafer fabrication costs, and other expenses related to collaborative arrangements. Our research and development efforts are focused on enhancing and developing additional

functionality for our existing products and on new product development, including new releases and upgrades to our LiDAR sensors. We expense research and development costs as incurred. We expect our research and development expenses to increase in absolute dollars as we increase our investment in new mechanical sensors, in engineering development for our S-Series program as well as in hardware and software development to broaden the capabilities of our solutions and introduce new products and features.

Sales and Marketing Expenses

Our sales and marketing expenses consist primarily of personnel-related costs directly associated with our sales and marketing activities. These include the cost of sales commissions, marketing programs, trade shows, consulting services, promotional materials, demonstration equipment, an allocated portion of facility and IT costs and depreciation. We intend to continue to make significant investments in our sales and marketing organization to drive additional revenue, further penetrate the market and expand our global customer base. As a result, we expect our sales and marketing expenses to increase in absolute dollars as we expect to invest in growing and training our sales force and broadening our brand awareness.

General and Administrative Expenses

General and administrative expenses primarily consist of personnel-related expenses associated with our general and administrative organization, professional fees for legal, accounting, other consulting services, as well as an allocated portion of facility and IT costs and depreciation. We expect to incur additional general and administrative expenses as a result of operating as a public company, including expenses related to compliance with the rules and regulations of the SEC and stock exchange listing standards, additional insurance expenses (including directors’ and officers’ insurance), investor relations activities and other administrative and professional services. We also expect to increase the size of the general and administrative function to support the growth of our business. However, we anticipate selling, general, and administrative expenses to decrease as a percentage of revenue over the long term.

Other Income (Expense)

Other income (expense) consists mainly of interest income, interest expense and other expenses. We receive interest income from our cash and cash equivalents investments in money market funds. Interest expense relates to interest on issuance of convertible notes and amortization of debt discount and issuance costs. Other expense includes periodic adjustments to derivative instruments at each balance sheet date and the change in fair value of warrant liabilities.

Income Tax Provision

Our income tax provision consists of federal, state, and foreign current and deferred income taxes. As we expand the scale and scope of our international business activities, any changes in the United States and foreign taxation of such activities may increase our overall provision for income taxes in the future.

We have a full valuation allowance for net deferred tax assets, including federal and state net operating loss carryforwards and research and development credit carryforwards. We expect to maintain this valuation allowance until it becomes more likely than not that the benefit of our federal and state deferred tax assets will be realized by way of expected future taxable income.

We believe that we have adequately reserved for our uncertain tax positions, although we can provide no assurance that the final outcome of these matters will not be materially different. To the extent that the final outcome of these matters is different than the amounts recorded, such differences will affect the provision for income taxes in the period in which such determination is made and could have a material impact on our financial condition and results of operations.

Results of Operations

Comparisons for the three months ended September 30, 2022 and 2021

The following table sets forth our condensed consolidated results of operations data for the periods presented:


	Three Months Ended September 30,
	2022			2021		$ Change			% Change
	($ in thousands)
Net sales	$	2,324		$	1,137	$	1,187			104	%
Cost of goods sold(1)		2,491			988		1,503			152	%
Gross profit (loss)		(167	)		149		(316	)		-212	%
Research and development(1)		6,504			3,953		2,551			65	%
Sales and marketing(1)		3,738			1,913		1,825			95	%
General and administrative(1)		6,839			3,950		2,889			73	%


Operating expenses		17,081			9,816			7,265		74	%
Operating loss		(17,248	)		(9,667	)		(7,581	)	78	%
Other income (expense):
Interest income (expense), net		34			(5,911	)		5,945		-101	%
Other expense, net		(438	)		(3,416	)		2,978		-87	%
Loss before income taxes		(17,652	)		(18,994	)		1,342		-7	%
Provision for income taxes		—			(5	)		5		-100	%
Net loss	$	(17,652	)	$	(18,999	)	$	1,347		-7	%

(1) Includes stock-based compensation expense (unaudited) as follows, in thousands:


	Three Months Ended September 30,
	2022		2021
Cost of goods sold	$	179	$	16
Research and development		1,321		415
Sales and marketing		1,012		211
General and administrative		2,196		2,706
	$	4,708	$	3,348

Our stock-based compensation expense is primarily related to our stock options, restricted stock units, and restricted stock awards for all periods presented. For the three months ended September 30, 2022, $3.9 million of compensation expense related to restricted stock units (“RSUs”) has been recognized as the performance vesting condition has been satisfied on the closing of a merger of the Company with a special purpose acquisition company.

Considering that our operating expenses are significantly higher than reported revenue for the periods presented, presenting the unaudited condensed consolidated statement of operations data as a percentage of revenue would not be meaningful, and hence it has been omitted.

Net Sales


	Three Months Ended September 30,
	2022		2021		$ Change		% Change
	($ in thousands)
Net Sales	$	2,324	$	1,137	$	1,187		104	%

Net sales by geographic location


	Three Months Ended September 30,
	2022		2021		$ Change			% Change
	($ in thousands)
Americas	$	1,775	$	308		1,467			476	%
Asia		379		684		(305	)		-45	%
Europe, Middle East and Africa		170		145		25			17	%
Total net sales	$	2,324	$	1,137		1,187			104	%

Net sales increased by $1.2 million in the three months ended September 30, 2022 compared to the same period in 2021. This increase is the result of increased customer orders along-side of general economic activity supported by maturing channel partnerships which helped drive an increase in M series LiDAR Sensor revenue. Security and Smart Spaces customers have been the largest drivers of this improvement. We also continued to see easing in the impact of COVID-19 on business conditions relative to the same period in 2021.

Cost of Goods Sold and Gross Margin


	Three Months Ended September 30,
	2022			2021		$ Change			% Change
	($ in thousands)
Cost of goods sold	$	2,491		$	988	$	1,503			152	%
Gross margin		(167	)		149		(316	)		-212	%


Gross margin %			-7	%			13	%

Cost of goods sold increased by $1.5 million in the three months ended September 30, 2022 compared to the same period in 2021, while gross profit decreased by $0.3 million during the same period. The increase in cost of goods sold and resultant decrease in gross margin was mainly attributable to a $0.8 million inventory purchase price adjustment and a $0.4 million increase in labor costs required to service future growth with hiring in anticipation of increased demand. The remaining increase was due to a $0.2 million increase in contractor and shipping costs and a $0.1 million increase in stock-based compensation.

Operating Expenses


	Three Months Ended September 30,
	2022		2021		$ Change		% Change
	($ in thousands)
Research and development	$	6,504	$	3,953	$	2,551		65	%
Sales and marketing		3,738		1,913		1,825		95	%
General and administrative		6,839		3,950		2,889		73	%
	$	17,081	$	9,816	$	7,265		74	%

Research and Development Expenses

Research and development expenses increased by $2.6 million in the three months ended September 30, 2022 compared to the same period in 2021. The increase was primarily attributable to a $2.0 million increase in personnel and related fringe costs resulting from increased headcount, which includes a $0.5 million increase due to retention bonuses and a $0.9 million increase in stock-based compensation, mainly for RSUs that vested or began vesting upon the closing of the Business Combination. The remaining increase was due to a $0.5 million increase in contractor services and a $0.1 million increase in allocations to R&D for facilities charges and manufacturing support.

Sales and Marketing Expenses

Sales and marketing expense increased by $1.8 million in the three months ended September 30, 2022 compared to the same period in 2021. The increase was primarily attributable to a $0.8 million increase in stock-based compensation, a $0.5 million increase in personnel and related fringe costs resulting from increased headcount, a $0.3 million increase in commission expense on increased sales and a $0.2 million increase in consulting services.

General and Administrative Expense

General and administrative expense increased by $2.9 million in the three months ended September 30, 2022 compared to the same period in 2021. The increase was primarily attributable to a $1.5 million increase in legal and consulting fees and a $1.1 million increase in insurance costs as a result of the Business Combination. The remaining increase consisted of a $0.6 million increase in personnel and related fringe costs, a $0.1 million increase in contractor services and a $0.1 million increase in fees related to public company costs, partially offset by a $0.5 million decrease in stock-based compensation costs related to restricted stock awards.

Interest Income (Expense), Net and Other Expense, Net


	Three Months Ended September 30,
	2022			2021			$ Change		% Change
	($ in thousands)
Interest income (expense), net	$	34		$	(5,911	)	$	5,945		-101	%
Other expense, net	$	(438	)	$	(3,416	)	$	2,978		-87	%

Interest income (expense), net decreased $5.9 million in the three months ended September 30, 2022 compared to the same period in 2021. The decrease was primarily attributable to the extinguishment of debt at closing of the Business Combination.

Other expense, net decreased $3.0 million in the three months ended September 30, 2022 compared to the same period in 2021. The decrease was primarily attributable to changes in fair values of our derivative liabilities that were extinguished at the close of the Business Combination.

Income Taxes


	Three Months Ended September 30,
	2022			2021			$ Change		% Change
	($ in thousands)
Loss before income taxes	$	(17,652	)	$	(18,994	)	$	1,342		-7	%
Provision for income taxes	$	—		$	(5	)	$	5		-100	%

We are subject to income taxes in the United States, China, Japan, UK, Germany and Canada. The change in the provision for income taxes during the three months ended September 30, 2022, as compared to the same period in 2021, was immaterial.

Comparisons for the nine months ended September 30, 2022 and 2021

The following table sets forth our condensed consolidated results of operations data for the periods presented:


	For the Nine Months Ended September 30,
	2022			2021			$ Change			% Change
	($ in thousands)
Net sales	$	4,880		$	2,425		$	2,455			101	%
Cost of goods sold(1)		6,797			2,245			4,552			203	%
Gross profit (loss)		(1,917	)		180			(2,097	)		-1165	%
Research and development(1)		25,769			12,050			13,719			114	%
Sales and marketing(1)		15,026			5,881			9,145			156	%
General and administrative(1)		54,850			13,142			41,708			317	%
Operating expenses		95,645			31,073			64,572			208	%
Operating loss		(97,562	)		(30,893	)		(66,669	)		216	%
Other income (expense):
Interest income (expense), net		(40,020	)		(14,872	)		(25,148	)		169	%
Other expense, net		(10,420	)		(8,400	)		(2,020	)		24	%
Loss before income taxes		(148,002	)		(54,165	)		(93,837	)		173	%
Provision for income taxes		(6	)		(15	)		9			-60	%
Net loss	$	(148,008	)	$	(54,180	)	$	(93,828	)		173	%

(1) Includes stock-based compensation expense (unaudited) as follows, in thousands:


	Nine Months Ended September 30,
	2022		2021
Cost of goods sold	$	1,016	$	57
Research and development		10,462		1,311
Sales and marketing		6,854		653
General and administrative		43,188		8,633
	$	61,520	$	10,654

Our stock-based compensation expense is primarily related to our stock options, restricted stock units, and restricted stock awards for all periods presented. For the nine months ended September 30, 2022, $58.8 million of compensation expense related to RSUs has been recognized as the performance vesting condition has been satisfied on the closing of a merger of the Company with a special purpose acquisition company.

Net Sales


	Nine Months Ended September 30,
	2022		2021		$ Change		% Change
	($ in thousands)
Net Sales	$	4,880	$	2,425	$	2,455		101	%

Net sales by geographic location

Nine Months Ended September 30,

2022

2021

$ Change

% Change

($ in thousands)


Americas	$	2,572	$	604	1,968	326	%
Asia		1,511		1,475	36	2	%
Europe, Middle East and Africa		797		346	451	130	%
Total net sales	$	4,880	$	2,425	2,455	101	%

Net sales increased by $2.5 million in the nine months ended September 30, 2022 compared to the same period in 2021. This increase is the result of increased customer orders supported by general economic activity and a more mature set of channel partner relationships which helped support an increase in M series LiDAR Sensor revenue. Security and Smart Spaces customers have remained the largest drivers of this improvement. We also saw some easing in the impact of COVID-19 on business conditions relative to the same period last year.

Cost of Goods Sold and Gross Margin


	Nine Months Ended September 30,
	2022			2021			$ Change			% Change
	($ in thousands)
Cost of goods sold	$	6,797		$	2,245		$	4,552			203	%
Gross margin		(1,917	)		180			(2,097	)		-1165	%
Gross margin %		-39	%		7	%

Cost of goods sold increased by $4.6 million in the nine months ended September 30, 2022 compared to the same period in 2021, while gross profit decreased by $2.1 million during the same period. The increase in cost of goods sold and the resultant decrease in gross margin was mainly attributable to a $1.7 million inventory purchase price adjustment, a $1.1 million increase in labor costs required to service future growth with hiring in anticipation of increased demand, a $1.0 million increase in stock-based compensation, a $0.6 million increase in materials cost and a $0.2 million increase in contractor services.

Operating Expenses


	Nine Months Ended September 30,
	2022		2021		$ Change		% Change
	($ in thousands)
Research and development	$	25,769	$	12,050	$	13,719		114	%
Sales and marketing		15,026		5,881		9,145		156	%
General and administrative		54,850		13,142		41,708		317	%
	$	95,645	$	31,073	$	64,572		208	%

Research and Development Expenses

Research and development expenses increased by $13.7 million in the nine months ended September 30, 2022 compared to the same period in 2021. The increase was primarily attributable to a $9.2 million increase in stock-based compensation, mainly for RSUs that vested or began vesting upon the closing of the Business Combination. The remaining increase was due to a $3.2 million increase in personnel and related fringe costs resulting from increased headcount, a $0.8 million increase in services, a $0.4 million increase in shipping costs and a $0.1 million increase in tools supplies costs.

Sales and Marketing Expenses

Sales and marketing expense increased by $9.1 million in the nine months ended September 30, 2022 compared to the same period in 2021. The increase was primarily attributable to a $6.2 million increase in stock-based compensation, with the remaining increase due to a $1.4 million increase in personnel and related fringe costs resulting from increased headcount, a $0.4 million increase in tradeshow and marketing costs resulting from increased business activity, a $0.7 million increase in commission costs on increased sales and a $0.4 million increase in consulting services.

General and Administrative Expense

General and administrative expense increased by $41.7 million in the nine months ended September 30, 2022 compared to the same period in 2021. The increase was primarily attributable to an increase of $34.6 million in stock-based compensation costs, mainly for RSUs that vested or began vesting upon the closing of the Business Combination. The remaining increase was due to a $3.2 million increase in insurance costs and a $1.7 million increase in legal and consulting fees as a result of the Business Combination, a $1.5 million increase in personnel and related fringe costs, a $0.3 million increase in contractor services, a $0.2 million increase in public company costs and a $0.2 million increase in a settlement liability.

Interest Income (Expense), Net and Other Expense, Net


	Nine Months Ended September 30,
	2022			2021			$ Change			% Change
	($ in thousands)
Interest income (expense), net	$	(40,020	)	$	(14,872	)	$	(25,148	)		169	%
Other expense, net	$	(10,420	)	$	(8,400	)	$	(2,020	)		24	%

Interest expense, net increased $25.1 million in the nine months ended September 30, 2022 compared to the same period in 2021. The increase was primarily attributable to $36.7 million of interest expense recognized on the conversion of the 2023 Notes (as defined below) to equity at closing of the Business Combination, partially offset by a $11.6 million decrease related to the extinguishment of debt in 2022.

Other expense, net increased $2.0 million in the nine months ended September 30, 2022 compared to the same period in 2021. The increase was primarily attributable to a $2.5 million gain recognized on the forgiveness of a PPP loan in 2021, offset by a $0.5 million decrease related to changes in fair value of derivative liabilities.

Income Taxes


	Nine Months Ended September 30,
	2022			2021			$ Change			% Change
	($ in thousands)
Loss before income taxes	$	(148,002	)	$	(54,165	)	$	(93,837	)		173	%
Provision for income taxes	$	(6	)	$	(15	)	$	9			-60	%

We are subject to income taxes in the United States, China, Japan, UK, Germany and Canada. The change in the provision for income taxes during the nine months ended September 30, 2022, as compared to the same period in 2021 was immaterial.

Liquidity and Capital Resources

Since Legacy Quanergy’s inception, it has financed operations primarily through the sale of shares of common stock, preferred stock, and convertible notes.

As a result, we have incurred negative cash flows from operating activities and significant losses from operations in the past as reflected in our accumulated deficit of $455.6 million as of September 30, 2022. We expect to continue to incur operating losses for at least the next 12 months due to the investments that we intend to make in our business and, as a result, we may require additional capital resources to grow our business.

In March 2018 and June 2018, we received $24.8 million and $0.7 million, respectively, through issuance of convertible promissory notes (the “2022 Notes”) to various investors. The 2022 Notes were secured by a security agreement and were due in March 2022. The principal amount accrued interest at 1.5% per annum, payable biannually, and additional interest at 8.0% per annum, which added to the principal and compounded on each payment date. The 2022 Notes were repaid at closing of the Business Combination.

In 2020, we issued convertible promissory notes of approximately $8.1 million in March 2020, $7.5 million in August 2020 and $0.5 million in October 2020 to various investors, that were due in March 2023 (the “2023 Initial Notes”). In conjunction with the 2023 Initial Notes, we issued 176,358 common stock warrants. We issued additional convertible promissory notes of approximately $48.7 million in February 2021 to various investors, which also mature in March 2023 (the “Extension Notes”, together with the “2023 Initial Notes”, the “2023 Notes”). In conjunction with the Extension Notes, we issued 314,901 common stock warrants in February 2021 (the “2023 Notes Warrants”). In connection with the Business Combination, the principal amount and deferred interest on the 2023 Notes were converted into 723,223 shares of our Common Stock.

As of September 30, 2022, we had $7.1 million of cash and cash equivalents. Further, we completed the Business Combination on February 8, 2022, and effectively settled our outstanding debt balance of $106 million, thereby providing us with additional future financial flexibility. The Business Combination also gave the Company access to $125 million from a previously announced share subscription facility from GEM. On May 25, 2022, we received $9.9 million in cash under the subscription facility in exchange for ultimate settlement of 1.3 million shares of Common Stock. In October 2022, we settled a second draw down under the facility for $1.7 million in cash in exchange for 320,000 shares of common stock. Additionally, on November 2, 2022, we completed a registered public offering from which we received net proceeds of $15.4 million in cash. As part of the public offering, Quanergy issued and sold 9,800,000 units, each consisting of one share of common stock, and two warrants, each with a term of 5 years to purchase one share of common stock at an exercise price of $1.70 per share. Our long-term capital requirements will depend on many factors including

timing and extent of spending to support research and development efforts as well as general and administrative activities for the business. We may in the future enter into arrangements to acquire or invest in related products, technologies, software and services, and we may need to seek additional equity or debt financing, which may not be available on terms acceptable to us. As of September 30, 2022, there were future minimum lease payments of $1.2 million through 2024.

As a result of the suspension of trading of our Common Stock on the NYSE, commencing November 8, 2022, we are currently not able to access the GEM facility. Should we continue to be unable to access the GEM facility, or if we are unable to raise additional capital, we will be forced to seek other forms of financing which may not be available in sufficient amounts to fund our operations. These conditions raise substantial doubt about our ability to continue as a going concern for a period of twelve months following the date of issuance of financial statements as of and for the nine months ended September 30, 2022. These condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. In the absence of additional sources of financing, we expect that our existing cash and cash equivalents will allow us to continue our planned operations into the first quarter of 2023.

The following table shows our cash flows from operating activities, investing activities and financing activities for the presented periods:


	Nine Months Ended September 30,
	2022			2021
	($ In thousands)
Net cash provided by (used in)
Operating activities	$	(44,951	)	$	(22,048	)
Investing activities		(454	)		(18	)
Financing activities		26,406			48,679
Effect of exchange rate changes		(43	)		(12	)
	$	(19,042	)	$	26,601

Operating Activities

For the nine months ended September 30, 2022, operating activities used $45.0 million in cash. The primary factors affecting our operating cash flows during this period were our net loss of $148.0 million and a $9.3 million cash interest payment on the 2022 Notes, partially offset by our non-cash charges of $106.1 million, primarily consisting of stock-based compensation of $61.5 million, non-cash interest expense of $40.1 million, non-cash expense of $10.4 million related to changes in derivative fair values, non-cash bonus expense of $2.3 million, depreciation and amortization of $0.7 million, $0.4 million of non-cash lease expense. The net cash used from changes in our operating assets and liabilities was $3.1 million. This amount consists of $6.3 million of cash used from changes primarily in our operating assets, due to a $2.3 million increase in inventory, a $2.0 million increase in accounts receivable, a $0.8 million increase in prepaid expenses and other current assets, a $0.7 million decrease in other current liabilities and a $0.5 million increase in other long-term assets, offset by $3.2 million of cash provided from changes in our operating liabilities consisting of a $2.9 million increase in accounts payable, a $0.1 million increase in other long-term liabilities and a $0.2 million increase in accrued settlement liabilities.

For the nine months ended September 30, 2021, operating activities used $22.0 million in cash. The primary factors affecting our operating cash flows during this period were our net loss of $54.2 million, offset by our non-cash charges of approximately $34.4 million primarily consisting of non-cash interest expense of $14.6 million, changes in fair value of derivative liabilities of $10.9 million, stock-based compensation of $10.7 million, a $2.5 million gain on the extinguishment of debt, and depreciation and amortization expense of $0.7 million. The net cash used from changes primarily in our operating assets was $2.2 million. This amount consists of $3.5 million of cash used from changes in our operating assets and liabilities consisting of a $2.7 million increase in other long-term assets, a $0.4 million decrease in other long term liabilities, a $0.3 million decrease in accrued expenses and a $0.1 million increase in accounts receivable, offset by $1.3 million of cash provided from changes in our operating assets and liabilities consisting of a $1.0 million decrease in inventory, a $0.2 million increase in accounts payable and a $0.1 million decrease in prepaid expenses and other current assets.

Investing Activities

Net cash used in investing activities for the nine months ended September 30, 2022 was $0.5 million and consisted of purchases of machinery and equipment for use in manufacturing operations. Net cash used in investing activities for the nine months ended September 30, 2021 was immaterial.

Financing Activities

During the nine months ended September 30, 2022, cash provided by financing activities was $26.4 million, primarily consisting of $50.4 million net proceeds from the Business Combination and sale of the PIPE Shares, $9.9 million in proceeds from the draw down of the GEM Agreement and $0.1 million in proceeds from the exercise of warrants and options, offset by $25.8 million in repayment of the 2022 Notes and $8.2 million in payment of offering costs.

During the nine months ended September 30, 2021, cash provided by financing activities was $48.7 million, consisting of $48.6 million in net proceeds from the issuance of convertible notes and proceeds of $0.1 million from the exercise of stock options.

Off-Balance Sheet Arrangements

As of September 30, 2022, we have not engaged in any off-balance sheet arrangements, as defined in the rules and regulations of the SEC.

Critical Accounting Policies and Significant Management Estimates

Our discussion and analysis of operating results and financial condition are based upon our financial statements. The preparation of our financial statements in accordance with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, sales, expenses and related disclosures of contingent assets and liabilities. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis.

See “Part I, Item 1, Note 2 – Summary of Significant Accounting Policies” and “Note 13 – Leases” included in this Quarterly Report on Form 10-Q for a discussion of a recently adopted accounting pronouncement that affects our accounting for lease obligations. During the nine months ended September 30, 2022, there have been no other material changes to our critical accounting policies from the ones described under the section Critical Accounting Policies and Estimates of Management’s Discussion and Analysis of Financial Condition and Results of Operations and Summary of Significant Accounting Policies in the notes to the audited consolidated financial statements filed as Exhibit 99.2 and Exhibit 99.1, respectively, to the Company’s Form 8-K/A filed with the SEC on March 31, 2022.

Recent Accounting Pronouncements

See “Note 1 – Recently Adopted Accounting Pronouncements” in our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure controls are procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Exchange Act, such as this report, is recorded, processed, summarized, and reported within the time period specified in the SEC’s rules and forms. Disclosure controls are also designed with the objective of ensuring that such information is accumulated and communicated to our management, including the chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the quarter ended September 30, 2022. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2022. Accordingly, management believes that the financial statements included in this report present fairly in all material respects our financial position, results of operations and cash flows for the period presented.

We do not expect that our disclosure controls and procedures going forward will prevent all errors and all instances of fraud. Disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Further, the design of disclosure controls and procedures must reflect the fact that there are resource constraints, and the benefits must be considered relative to their costs. Because of the inherent limitations in all disclosure controls and procedures, no evaluation of disclosure controls and procedures can provide absolute assurance that we have detected all our control deficiencies and instances of fraud, if any. The design of disclosure controls and

procedures also is based partly on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the quarter ended September 30, 2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

In August 2016, Velodyne alleged patent infringement and threatened litigation against us. In response, we filed a complaint in the Northern District of California seeking a declaratory judgment of non-infringement of Velodyne’s patent. Velodyne filed its answer and counterclaim for infringement of its patent and we filed our answer on January 16, 2017. In October 2017, the court issued a claim construction order construing eight terms in Velodyne’s patent. In November 2017, we filed two petitions for inter partes review (“IPR”) before the Patent Trial and Appeal Board at the U.S. Patent and Trademark Office (“PTAB”), asserting that all asserted claims of Velodyne’s patent are invalid over prior art. In January 2018, the court granted a stipulation filed by the parties, staying the district court litigation until the patent office decided whether to grant or deny our pending petitions. In March 2018, Velodyne filed its responses to both of the Company’s petitions. In May 2018, the PTAB instituted both IPRs on all petitioned claims and issued Final Written Decisions finding all petitioned claims are not invalid. We petitioned for rehearing in June 2019, which the PTAB denied in May 2020, Quanergy filed an appeal to the Court of Appeals for the Federal Circuit (“CAFC”) for each IPR (consolidated as docket no. CAFC-20-2070). Oral argument was held on July 7, 2021. On February 4, 2022, the CAFC affirmed the decision of the PTAB.

ITEM 1A. RISK FACTORS

Summary of Risks:

Our business is subject to a number of risks that you should carefully consider. A summary of these risks that could adversely affect our business, financial condition, operating results and prospects includes the following:

•

We have incurred operating losses in the past, expect to incur operating losses in the future and may never achieve or maintain profitability.

•

We will require additional capital to meet our financial obligations and support planned business growth, and this capital might not be available on acceptable terms or at all.

•

We operate in evolving markets, which make it difficult to evaluate our business and prospects. If markets for LiDAR products, including autonomous driving, security & smart spaces, robotics, industrial and other commercial applications, develop more slowly than we expect, or long- term end-customer adoption rates and demand are slower than we expect, our operating results and growth prospects could be harmed.

•

Product integration could face complications or unpredictable difficulties, which may adversely impact customer adoption of our products and our financial performance.

•

The market for LiDAR sensors is highly competitive and many companies are actively focusing on LiDAR technology or competing technologies based on camera, radar or other technologies. If we fail to differentiate ourselves and compete successfully with these companies, many of which have substantially greater resources, our products may become obsolete and it will be difficult for us to attract customers and our business will be harmed.

•

Our Optical Phased Array (“OPA”) based product could fail to meet industry requirements for range, resolution or general performance or we could fall short of our cost objectives for OPA-based LiDAR, thereby limiting our revenue potential.

•

Developments in alternative non-LiDAR technologies may adversely affect the demand for LiDAR sensors.

•

If we are not able to effectively grow our global sales and marketing organization, or maintain or grow an effective network of distributors, value-added resellers, and integrators, our business prospects, results of operations and financial condition could be adversely affected.

•

We continue to implement strategic initiatives designed to grow our business. These initiatives may prove more costly than we currently anticipate and we may not succeed in increasing our revenue in an amount sufficient to offset the costs of these initiatives and to achieve and maintain profitability.

•

We have limited manufacturing capacity and intend to depend primarily on a small number of contract manufacturers and manufacturing partners in the future. Our operations could be disrupted if we encounter delays or other problems with these contract manufacturers.

•

Our products incorporate key components, including computer chips, from sole source suppliers and if our contract manufacturers are unable to source these components on a timely basis, due to fabrication capacity issues or other material supply constraints, or if there are interruptions in our, or our contract manufacturers’ relationships with these third-party suppliers, we will not be able to deliver our products to our distributors and customers which would adversely impact our business.

•

We may incur significant direct or indirect liabilities in connection with our product warranties which could adversely affect our business and operating results.

•

We have been and may continue to be subject to litigation regarding intellectual property rights that could be costly, including claims that we are infringing third-party intellectual property, whether successful or not, and could result in the loss of rights important to our products or otherwise harm our business.

•

We are subject to, and must remain in compliance with, numerous laws and governmental regulations across various jurisdictions concerning the manufacturing, use, distribution and sale of our products.

•

The effects of the COVID-19 pandemic have had and could continue to have a material adverse effect on our business prospects, financial results, and results of operations.

•

We have identified a material weakness in our internal control over financial reporting as of December 31, 2021. If we are unable to develop and maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results in a timely manner, which may adversely affect investor confidence in us and materially and adversely affect our business and operating results.

•

We may issue additional shares of Common Stock, including under the GEM Warrant (as defined herein), the Company's 2022 Equity Incentive Plan and the Company's 2022 Employee Stock Purchase Plan. Any such issuances would dilute the interest of our shareholders and likely present other risks.

The risk factors set forth below with an asterisk (*) next to the title contain changes to the description of the risk factors associated with our business previously disclosed in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2021. Additional risks and uncertainties that we are unaware of may also become important factors that affect us.

Risks Related to Our Industry and Business

We have incurred operating losses in the past, expect to incur operating losses in the future and may never achieve or maintain profitability.*

We have experienced net losses in each year since our inception. In the years ended December 31, 2021 and 2020 and the nine months ended September 30, 2021, Legacy Quanergy incurred net losses of $63.5 million, $35.8 million and $54.2 million, respectively. In the nine months ended September 30, 2022, we incurred net losses of $148.0 million. You should not rely on the revenue growth of any prior quarterly or annual period as an indication of our future performance. We expect these losses to continue for at least the next several years as we expand our product offering and continue to scale our commercial operations and research and development program. As of September 30, 2022, we had an accumulated deficit of $455.6 million. Even if we are able to increase sales of our products, there can be no assurance that we will ever be profitable.

We expect we will continue to incur significant losses for the foreseeable future as we:

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continue to hire additional personnel and make investments in research and development in order to develop technology and related software;

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increase our sales and marketing functions, including expansion of our customer support and distribution capabilities;

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hire additional personnel to support compliance requirements in connection with being a public company; and

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expand operations and manufacturing.

If our products do not achieve sufficient market acceptance, our revenue growth rate may be slower than we expect, we may not be able to increase revenue enough to offset the increase in operating expenses resulting from investments, and we will not become profitable. If we fail to become profitable, or if we are unable to fund our continuing losses, we may be unable to continue our business operations. There can be no assurance that we will ever achieve or sustain profitability. If we do achieve profitability, we may not be able to sustain or increase profits on a quarterly or annual basis. Our failure to become and remain profitable would decrease the value of the Company and could impair our ability to raise capital, maintain our research and development efforts, expand our business or continue our operations. A decline in the value of our Company could cause you to lose all or part of your investment.

We will require additional capital to meet our financial obligations and support planned business growth, and this capital might not be available on acceptable terms or at all.*

Historically, we have funded our operations since inception primarily through equity, and equity-linked notes. We intend to continue to make significant investments to support planned business growth and will require additional funds to respond to business challenges, including the need to develop new sensing products and technology, maintain adequate levels of inventory to support demand requirements of our distributors and customers, improve our operating infrastructure or acquire complementary businesses, personnel and technologies. Accordingly, we will need to engage in equity or debt financings to secure additional funds. If we raise additional funds through future issuances of equity or convertible debt securities, our then existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our Common Stock. Any debt financing we secure, the debt holders would have rights senior to the holders of our Common Stock to make claims on our assets, and the terms could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. If we were to violate the restrictive covenants, we could incur penalties, increased expenses and an acceleration of the payment terms of our outstanding debt, which could in turn harm our business.

Because our decision to issue securities or raise financing in the future will depend on numerous considerations, including factors beyond our control, we cannot predict or estimate the amount, timing or nature of any future issuances of debt or equity securities. In addition, our ability to raise capital under the Share Purchase Agreement, dated December 12, 2021 and entered into by CCAC, GEM Global Yield LLC SCS and GEM Yield Bahamas Ltd. for the Company’s liquidity needs post Business Combination (the “GEM Agreement”) is conditioned upon the trading of our shares on a U.S. national securities exchange or other stock exchange (which does not include the over-the-counter market) and is limited by trading volume and our aggregate market capitalization, each of which may inhibit our ability to maximize that facility in the near term. Our stockholders bear the risk of future issuances reducing the value of our Common Stock and diluting their interests. We may not be able to obtain additional financing on terms favorable to us, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly impaired, our business may be harmed, and/or we may be forced to cease operations.

We operate in evolving markets, which make it difficult to evaluate our business and prospects. If markets for LiDAR products, including autonomous driving, security & smart spaces, robotics, industrial and other commercial applications, develop more slowly than we expect, or long-term end-customer adoption rates and demand are slower than we expect, our operating results and growth prospects could be harmed.*

While LiDAR has existed for some time for terrestrial and aerial mapping applications and for research and development level automotive applications, the concept of low cost and high-volume LiDAR for markets like automotive and security & smart spaces applications is relatively new and rapidly evolving, making our business and prospects difficult to evaluate. The growth and profitability of these markets (collectively, the “Sensing Solutions Market”) and the level of demand and market acceptance for LiDAR technology are subject to a high degree of uncertainty. The future growth of our business depends on the growth of these Sensing Solutions Market. We cannot be certain that this will happen. If consumers do not perceive meaningful benefits of LiDAR technology, then these markets may develop more slowly than we expect, which could adversely impact our operating results and our ability to grow our business.

If our customers and partners are unable to maintain and increase acceptance of LiDAR technology, our business, results of operations, financial condition and growth prospects would be adversely affected.

Our future operating results will depend on the ability of our customers and partners to create, maintain and increase acceptance of LiDAR technology. There is no assurance that our customers and partners can achieve these objectives. Acceptance of our LiDAR technology in the global Sensing Solutions Market depends upon many factors, including regulatory requirements applicable to such

markets, evolving safety standards and perceptions, cost and consumer preferences. Market acceptance of LiDAR technology also depends on the ability of market participants, including us, to resolve technical challenges facing the Sensing Solutions Market in a timely and cost-effective manner. Consumers will also need to be made aware of the advantages of the LiDAR technology compared to competing technologies, specifically those with different sensor arrays, such as camera, and radar in automotive, and camera, infrared and microwave in security. If consumer acceptance of LiDAR technology in the global Sensing Solutions Market does not occur or occurs more slowly than we expect, sales of our products could also be adversely affected.

Product integration could face complications or unpredictable difficulties, which may adversely impact customer adoption of our products and our financial performance.

Our products typically function as part of a system, and are therefore integrated with other sensing technologies, software products and customer applications. Required integration efforts can be time consuming and costly and there is no guarantee that results will be satisfactory to the end customer. These challenges are even more present in the automotive sector where components are subject to as much as several years of product and design validation before they are fitted into a vehicle program. While the company works with system integrators which lend their experience to these workstreams, there is no guarantee that unforeseen delays or setback would not arise that would impair our ability to launch with key programs across our sectors of focus.

The LiDAR sensor market is becoming increasingly competitive and global. Our competitors are numerous and they compete with us directly by offering LiDAR products and indirectly by attempting to solve some of the same challenges with different technology. We face competition from camera and radar companies, other developers of LiDAR products, and other technology and supply companies, some of which have already completed public offerings and have significantly greater resources than we do. Some examples of our competitors include Velodyne, Innoviz Technologies Ltd., Aeva, Inc., Luminar Technologies, Inc., Hesai Technology Co., Ltd., AEye, Ouster, Inc., and Ibeo Automotive Systems GmbH among others.

Over the last few years we have seen a proliferation of entrants into the LiDAR market with various technical approaches intended to reduce the size of the LiDAR sensors, such as flash LiDAR, micro-electro- mechanical system (“MEMS”) mirrors, and downsized macroscale oscillating technology. Concurrently, in non-automotive applications we have seen increased competition as companies have sought to offset the delayed introduction of autonomous vehicles by focusing in other areas. While we believe that our solid-state approach will yield a desired reduction in size, cost and reliability that customers require, we expect competition will remain stiff from new companies with products based on existing and new technologies. We also think more companies will look to compete with us by offering paired hardware/software solutions to compete with our smart spaces / security applications. Our products may become obsolete as LiDAR and other competing technologies continue to progress.

This increased competition could result in pricing pressure, lower revenue and gross profit. To remain competitive and maintain our position as a leading sensing technology provider, we need to continuously invest in product research and development, service and support, and product distribution infrastructure as well as sales and marketing. We may not have sufficient resources to continue to make the investments needed to maintain our competitive position. In addition, certain of our competitors have longer operating histories, greater name recognition, larger customer bases and significantly greater financial, technical, sales, marketing and other resources than us. These competitors may also be able to adapt more quickly to new or emerging technologies or standards and may be able to deliver products and services at a lower cost. Increased competition could reduce our market share, revenue and operating margins, increase our operating costs, harm our competitive position and otherwise harm our business.

Adverse conditions in the global Sensing Solutions Market or the global economy more generally could have adverse effects on our results of operations.

Our business partially depends on, and is directly affected by, the global Sensing Solution Markets. As in any manufacturing industry, production and sales can be cyclical and depend on general economic conditions and other factors, including consumer spending and preferences, changes in interest rate levels and credit availability, consumer confidence, raw material costs, availability of competing products or technologies, environmental impact, governmental incentives and regulatory requirements, and political volatility, especially in growth markets. OEMs which make products that may incorporate our sensing solution (e.g., car makers that ultimately
sell completed vehicles to consumers) may experience difficulties from weakened economies and tightened credit markets. The industrial market may see weakened demand for instillations in the areas of robotics and automatic guided vehicles. In the flow management space we could continue to see project delays in key areas like airports, ports, intersections, and security applications as

infrastructure upgrades are delayed. Any significant adverse change in any of these factors, including, but not limited to, general economic conditions could have a material adverse effect on our business, results of operations and financial condition.

Autonomous and highly automated vehicles rely on a complex set of technologies, and there is no assurance that the rate of acceptance and adoption of these technologies will increase in the near future or that a market for fully autonomous vehicles will develop.

Autonomous and highly automated driving relies on a complex set of technologies, which requires the coordinated development of sensing, mapping, object detection and classification as well as path planning and navigation. These functions and capabilities are in different stages of development, and their reliability must continue to improve in order to meet the higher standards required for autonomous driving. Sensing technology provides information to the car and includes the physical sensors, as well as object classification and perception software. In many cases, it will be sold as part of a system where it must work within the core autonomous driving platform of an original equipment manufacturer. If customer technology is not ready to be deployed in vehicle models when our sensing technology is ready for adoption, launch of production could be delayed, perhaps for a significant time period, which could materially adversely affect our business, results of operations and financial condition.

There are a number of additional challenges to autonomous driving, all of which are outside of our control, including market acceptance of autonomous driving, particularly fully autonomous driving, national or state certification requirements and other regulatory measures, concerns regarding litigation, cyber security risks, as well as a general aversion by some consumers to the idea of self-driving vehicles. There can be no assurance that the market will accept any vehicle model, including a vehicle containing our technology, in which case our future business, results of operations and financial condition could be adversely affected.

Our ability to market our LiDAR technology outside of automotive applications may take longer than we anticipate and may not be successful.*

We are investing in, and pursuing market opportunities outside of, the automotive markets, including security, industrial automation and smart city and smart spaces initiatives. We believe that our future revenue growth, if any, will depend in part on our ability to expand within new markets such as these and to enter new markets as they emerge. Each of these markets presents distinct risks and, in many cases, requires us to address the particular requirements of that market. Smart spaces customers could find alternative methods to address flow management requirements. And within industrial markets, our success is highly dependent on presenting a compelling and differentiated price-performance advantage relative to established players in the market.

With the exception of industrial automation, the market for LiDAR technology outside of automotive applications is relatively new, rapidly developing and unproven in many markets or industries. Many of our customers in these areas are still in the testing and development phases and it cannot be certain that they will commercialize products or systems with our LiDAR products or at all. We cannot be certain that LiDAR will be sold into these markets at scale. Adoption of LiDAR products, including our products, outside of the automotive industry will depend on numerous factors, including: whether the technological capabilities of LiDAR and LiDAR-based products meet users’ current or anticipated needs, whether the benefits of designing LiDAR into larger sensing systems outweigh the costs, complexity and time needed to deploy such technology or replace or modify existing systems that may have used other modalities such as cameras and radar, whether users in other applications can move beyond the testing and development phases and proceed to commercializing systems supported by LiDAR technology and whether LiDAR developers, such as us, can keep pace with rapid technological change in certain developing markets and the global response to the COVID-19 pandemic. If LiDAR technology does not achieve commercial success outside of the automotive industry, or if the market develops at a pace slower than we expect, our business, results of operation and financial condition will be materially and adversely affected.

Our new product lines could face difficulties gaining market traction and adversely impact our financial performance.

One of the challenges inherent in developing hardware is long development times. Our products have lengthy design, test & validation and production cycles that can require multiple iterations. There can be no guarantee that by the time a product comes to market it will have the right performance, specifications and cost to address the use cases it was originally designed for. Conversely, even if the characteristics of the product are correct for its original purpose, there is the additional risk that the needs of the market may have evolved and changed requiring further alterations to the product or a different solution which could significantly impact demand for our products.

The S3 program was developed with automotive requirements in mind encompassing factors such as range, resolution, horizontal and vertical field of view, and of course cost and reliability. There can be no assurance that our devices will meet customer requirements for all of these specifications or that they will outperform products developed by our competitors. Additionally, as discussed in the risk factor above, given the significant development time required with multiple iterations of customized silicon, it is possible OEMs requirements may shift away from the product requirements that our LiDAR sensors were originally designed for. Such an outcome would materially impact our revenue plans particularly in future years where the contribution from automotive is expected to be most meaningful.

Currently, the largest part of our M Series sales is for flow management solutions like security, smart city, and smart spaces applications. While we have seen promising levels of activity from potential end users evaluating LiDAR for these applications, the technology is relatively new to this market and there can be no guarantee that industry adoption will occur at the pace contemplated in our forecasts. Conversely, LiDAR has been an important technology for the industrial market for some time, supported by well-established players like Sick AG, P&F and Hokuyo. While the Company has a presence in port automation and is expecting to expand its position through new product introductions, there is a risk that these products could fail to gain traction against very well-established competitors in these end markets.

Our OPA based product could fail to meet industry requirements for range, resolution or general performance or we could fall short of our cost objectives for OPA-based LiDAR, thereby limiting our revenue potential.

Our OPA-based solid state LiDAR was designed and developed from the ground up. All the main semiconductor components are custom designed in-house and fabricated and packaged by third-party partners. Each generation of technology node consists of iterations of one or multiple components. The integration of all these together with the rest of the electrical, mechanical and firmware modules is a complex system integration exercise. Problems could arise during this process to cause the planned product to fall short on some requirements, including range, resolution, other performance parameters or cost objectives. The resulting delay could slow down our time-to-market efforts, limit our revenue potential or lead to negative impressions on customer engagements, any of which would harm our business.

Unforeseen safety issues with our products could result in injuries to people which could result in adverse effects on our business and reputation.

Our LiDAR utilizes lasers for performing 3D sensing. While we have developed system components designed to prevent our LiDAR lasers from harming human eyes, in the event that an unforeseen issue arises that results in serious injury, our reputation or brand may be damaged and we could face legal claims for breach of contract, product liability, tort or breach of warranty as a result of these problems. Defending such a lawsuit, regardless of its merit, could be costly and may divert management’s attention and adversely affect the market’s perception of our Company and our products. In addition, our business liability insurance coverage could be inadequate with respect to a claim and future coverage may be unavailable on acceptable terms or at all.

We create innovative technology by designing and developing unique components. A failure to achieve scale may affect our ability to sell at competitive prices, limit our customer base or may lead to losses.

We incur significant costs related to procuring the raw materials and components required to manufacture our high-performance LiDAR systems, assembling LiDAR systems and compensating our personnel. If our volumes do not ramp up as planned we may be unable to obtain anticipated material costs benefits, or expected levels of fixed cost absorption that are needed to achieve our targeted margins and our operating results, business and prospects will be harmed. Furthermore, many of the factors that impact our operating costs are beyond our control. For example, the costs of our raw materials and components could increase due to shortages as global demand for these products increases.

The manufacture of our LiDAR systems is a complex process, and it is often difficult for companies to achieve acceptable product yields which could decrease available supply and increase costs. LiDAR system yields depend on both our product design and the manufacturing processes of our manufacturing partners. Because low yields may result from either design defects or process difficulties, we may not identify yield problems until well into the production cycle, when an actual product defect exists and can be analyzed and tested. In addition, many of these yield problems are difficult to diagnose and time consuming or expensive to remedy.

Developments in alternative non-LiDAR technologies may adversely affect the demand for LiDAR sensors.

Significant developments in alternative technologies, such as cameras and radar, may materially and adversely affect our business, prospects, financial condition and operating results in ways we do not currently anticipate. Existing and other camera and radar technologies may emerge as customers’ preferred alternative to our solutions. Any failure by us to develop new or enhanced technologies or processes, or to react to changes in existing technologies, could materially delay our development and introduction of new and enhanced products in the autonomous vehicle industry, which could result in the loss of competitiveness of our LiDAR solutions, decreased revenue and a loss of market share to competitors. Our research and development efforts may not be sufficient to adapt to changes in technology. For example, although we believe that LiDAR technology is, and will continue to be, a critical component to the active safety and autonomous vehicle markets it is possible that other sensor types, such as camera or radar or yet another disruptive modality based on new or existing technology, will achieve acceptance or dominance in the market. If such competing technology gains acceptance by the market, regulators and safety organizations in place of or as a substitute for LiDAR technology, our business, results of operations and financial condition would be adversely affected.

As technologies change, we plan to upgrade or adapt our LiDAR solutions with the latest technology. However, our solutions may not compete effectively with alternative systems if we are not able to source and integrate the latest technology into our existing LiDAR solutions.

Our future success will depend on our ability to train, retain and motivate skilled sales managers and direct sales representatives with significant technical knowledge and understanding of our products. Because of the competition for their skill set, we may not be able to attract or retain such personnel on reasonable terms. If we are unable to grow our global sales and marketing organization, we may not be able to increase our revenue, which would adversely affect our business, financial condition and results of operations.

Additionally, our growth outlook relies on adding a number of strategic channel partners to our network to help support the sales of our products. It may take time to identify and add these partners, to train new personnel to market and support our products. In addition, our distributors may not successfully market and sell our products and may not devote sufficient time and resources that we believe are necessary to enable our products to develop, achieve or sustain market acceptance. Any of these factors could reduce our revenue or impair our revenue growth in affected markets, increase our costs in those markets or damage our reputation. As a result of our reliance on third-party distributors, we may be subject to disruptions and increased costs due to factors beyond our control, including labor strikes, third-party errors and other issues. If the services of any of these third-party distributors become unsatisfactory, we may experience delays in meeting our customers’ demands and we may be unable to find a suitable replacement on a timely basis or on commercially reasonable terms. Any failure to deliver products in a timely manner may damage our reputation and could cause us to lose potential customers.

We currently have and target many customers, suppliers and production counterparties that are large corporations with substantial negotiating power, exacting product, quality and warranty standards and potentially competitive internal solutions. If we are unable to sell our products to these customers or are unable to enter into agreements with customers, suppliers and production counterparties on satisfactory terms, our prospects and results of operations will be adversely affected.

Several of our customers and potential customers are large, multinational corporations with substantial negotiating power relative to us. These large, multinational corporations also have significant development resources, which may allow them to acquire or develop independently, or in partnership with others, competitive technologies. Meeting the technical requirements and securing design wins with any of these companies will require a substantial investment of our time and resource. We cannot assure you that our products will secure design wins from these or other companies or that we will generate meaningful revenue from the sales of our products to these key potential customers. If our products are not selected by these large corporations or if these corporations develop or acquire competitive technology, it will have an adverse effect on our business.

Our business would be adversely affected if not enough customers and partners, including OEMs, were to adopt our products or those customers and partners that adopt our products were to change their design or systems and not include our products in future models.

We currently have no high-volume automotive OEM that has adopted our products in its advanced driver-assistance systems and/or autonomous vehicle systems. For the most part our principal customers and partners have been in mapping, flow management, and industrial applications where rates of adoption of our products are still low. We will need to expand our customer base and partner network rapidly to grow our sales revenue. If not enough customers and partners were to adopt our products or those customers and partners that adopt our products were to determine not to incorporate our products in their future models generally due to a change to their model design, systems or otherwise, our business, results of operations and financial condition would be adversely affected.

We invest effort and money seeking customers’ validation of our products in the Sensing Solutions Market, and there can be no assurance that we will win their acceptance in a timely manner or at all. If we do not win sufficient acceptance from our customers, our future business, results of operations and financial condition could be adversely affected.

We invest significant effort and money in proof of concepts and pilot programs designed to get customers familiar with our sensing solution for their products and systems. Customers in the Sensing Solution Markets will acquire our products from us or our partners and integrate them into their products and systems that they manufacture. We could fail to secure proof of concept opportunities for new products, or fail to perform during proof of concept opportunities and expend our resources without obtaining such “design wins.” In addition, the firm with the winning design may have an advantage with the customer going forward because of the established relationship between the winning firm and such customer, which could make it more difficult for such firm’s competitors to win the designs for other products and systems such customer produces. If we fail to win a significant number of customer design competitions in the future, our business, results of operations and financial condition would be adversely affected.

We must successfully manage product introductions and transitions in order to remain competitive.

We must continually develop new and improved sensing solutions that meet changing consumer demands. Moreover, the introduction of new products is a complex task involving significant expenditures in research and development, promotion and sales channel development, and management of existing inventories to reduce the cost associated with returns and slow moving inventory. As new sensing solutions are introduced, we have to closely monitor the inventory at our contract manufacturers, and phase out the manufacture of prior versions in a controlled manner. Moreover, we must introduce new sensing solutions in a timely and cost-effective manner, and we must secure production orders for those solutions from our contract manufacturers and component suppliers. The development of new sensing solutions is a highly complex process, and while we have a large number of product introductions coming, the successful development and introduction of new sensing solutions depends on a number of factors, including the following:

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the accuracy of our forecasts for market requirements beyond near term visibility;

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our ability to anticipate and react to new technologies and evolving consumer trends;

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our development, licensing or acquisition of new technologies;

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our timely completion of new designs and development;

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the ability of our contract manufacturers to cost-effectively manufacture our new sensing solutions;

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the availability of materials and key components used in the manufacture of our new sensing solutions; and

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our ability to attract and retain world-class research and development personnel.

If any of these or other factors becomes problematic, we may not be able to develop and introduce new sensing solutions in a timely or cost-effective manner, and our business may be harmed.

Our international expansion plans, if implemented, will subject us to a variety of risks that may harm our business.

We have limited experience managing the administrative aspects of a global organization. While we intend to continue to explore opportunities to expand our business in international Sensing Solution Markets in which we see compelling opportunities, we may not be able to create or maintain international market demand for our products. In addition, as we expand our operations internationally, our support organization will face additional challenges, including those associated with delivering support, training and documentation in languages other than English. We may also be subject to new statutory restrictions and risks. If we invest substantial time and resources to expand our international operations and are unable to do so successfully and in a timely manner, our business and financial condition may be harmed.

In the course of expanding our international operations and operating overseas, we will be subject to a variety of risks, including:

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differing regulatory requirements, including tax laws, trade laws, labor regulations, tariffs, export quotas, custom duties or other trade restrictions;

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greater difficulty supporting and localizing our products;

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challenges inherent in efficiently managing an increased number of employees over large geographic distances, including the need to implement appropriate systems, policies, compensation and benefits and compliance programs;

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differing legal and court systems, including limited or unfavorable intellectual property protection;

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risk of change in international political or economic conditions;

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restrictions on the repatriation of earnings; and

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working capital constraints.

In the automotive industry, the period of time from a design win to implementation is long, and we are subject to the risks of cancellation or postponement of contracts or unsuccessful implementation.

Our products are technologically complex, incorporate many technological innovations and are often intended for use in safety applications. Prospective OEM customers generally must make significant commitments of resources to test and validate our products before including them in any particular product or system. The development cycles of our products with new OEM customers can be long after a design win, if we successfully obtain it, depending on the OEM and the complexity of the product and system in question. These development cycles may make it necessary for us to invest our resources prior to realizing any revenues from the OEM that adopted our product. Further, we are subject to the risk that an OEM cancels or postpones implementation of our technology, as well

as that we will not be able to implement our technology successfully. Further, our sales could be less than forecasted if the ultimate product or system is unsuccessful in the Sensing Solution Markets, including for reasons unrelated to our product or technology. Long development cycles and product cancellations or postponements may adversely affect our business, results of operations and financial condition.

Continued pricing pressures and customer cost reduction initiatives may result in lower than anticipated margins, or losses, which may adversely affect our business.

Cost-cutting initiatives adopted by our customers often result in increased downward pressure on pricing. We expect that our agreements with customers may require step-downs in pricing over the term of the agreement or, if commercialized, over the period of production. In addition, our customers may reserve the right to terminate their supply contracts for convenience, which enhances their ability to obtain price reductions. Automotive OEMs also possess significant leverage over their suppliers because the automotive component supply industry is highly competitive, serves a limited number of customers and has a high fixed cost base. We expect to be subject to substantial continuing pressure from customers and suppliers to reduce the price of our products. It is possible that pricing pressures beyond our expectations could intensify as customers pursue restructuring, consolidation and cost-cutting initiatives. If we are unable to generate sufficient production cost savings in the future to offset price reductions, our gross margin and profitability would be adversely affected.

We continue to make investments and implement initiatives designed to grow our business, including:

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investing in research and development;

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expanding our sales and marketing efforts to attract new customers across industries;

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investing in new applications and markets for our products;

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further enhancing our manufacturing processes and partnerships; and

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investing in legal, accounting, and other administrative functions necessary to support our operations as a public company.

These initiatives may prove more expensive than we currently anticipate, and we may not succeed in increasing our revenue, if at all, in an amount sufficient to offset these higher expenses and to achieve and maintain profitability. The market opportunities we are pursuing are at an early stage of development, and it may be many years before the end markets we expect to serve generate significant demand for our products at scale, if at all.

In addition, our revenue may be adversely affected for a number of reasons, including the development and/or market acceptance of new technology that competes with our LiDAR products, failure of our customers to commercialize systems that include our LiDAR solutions, our inability to effectively manage our inventory or manufacture products at scale, our failure to enter new markets or to attract new customers or expand orders from existing customers or due to increasing competition. Furthermore, it is difficult to predict the size and growth rate of our target markets, customer demand for our products, commercialization timelines, developments in sensing and related technology, the entry of competitive products, or the success of existing competitive products and services. Accordingly, we do not expect to achieve profitability over the near term. If our revenue does not grow over the long term, our ability to achieve and maintain profitability may be adversely affected, and the value of its business may significantly decrease.

If our efforts to build a strong brand and maintain customer satisfaction and loyalty are not successful, or we are subject to negative publicity, we may not be able to attract or retain customers, and our business may be harmed.

Building and maintaining a strong brand is important to attract and retain customers, as potential customers have a number of choices among on a variety of sensing solutions. Successfully building a brand is a time consuming and comprehensive endeavor and can be positively and negatively impacted by any number of factors. Our competitors may be able to achieve and maintain brand awareness and market share more quickly and effectively than we can. Customer use case optimization issues associated with new product launches could also impair our brand perception. If we are unable to execute on building a strong brand, it may be difficult to differentiate our business from our competitors in the marketplace.

Risks Related to Manufacturing and Supply

Our “in house” manufacturing operation is primarily focused on new product introductions and prototype builds, and as such we rely on a small number of contract manufacturers for production. Our contract manufacturers and manufacturing partners are vulnerable to capacity constraints and reduced component availability, and our control over delivery schedules, manufacturing yields and costs is limited, particularly when components are in short supply or when we introduce a new sensor or sensing system. In addition, we have limited control over our contract manufacturers’ quality systems and controls, and therefore must rely on them to manufacture our products to our quality and performance standards and specifications, and we must remain in agreement on the substantive commercial terms governing our commercial relationships with these suppliers. Delays, component shortages and other manufacturing and supply problems could impair the retail distribution of our products and ultimately our brand. Furthermore, any adverse change in our contract manufacturers’ financial or business condition could disrupt our ability to supply products to our distributors and customers.

If our primary and secondary contract manufacturers or manufacturing partners fail for any reason to continue manufacturing our products in required volumes and at high quality levels, or at all, we would have to identify, select and qualify new acceptable alternative contract manufacturers. Alternative contract manufacturers may not be in a position to satisfy our production requirements at commercially reasonable prices or to our quality and performance standards within the required timeline. Any significant interruption in manufacturing would require us to reduce our supply of products to our distributors and customers, which in turn would reduce our revenue and growth.

We have little experience manufacturing our products at full commercial scale. If our products are adopted by a large number of customers and/or by customers requiring a large amount of supply, we will face certain risks associated with scaling up our manufacturing capabilities to support such mass commercial production.

We do not have experience in manufacturing our products on a mass scale. If our products are adopted by a large number of customers and/or by customers requiring a large amount of supply, we may need to expand our manufacturing facilities, add manufacturing personnel and ensure that validated processes are consistently implemented in our facilities and potentially enter into relationships with third-party manufacturers. The upgrade and expansion of our facilities may require additional regulatory approvals. In addition, it will be costly and time-consuming to expand our facilities and recruit necessary additional personnel. If we are unable to expand our manufacturing facilities in compliance with regulatory requirements or to hire additional necessary manufacturing personnel, we may encounter delays or additional costs in achieving our research, development and commercialization objectives, including researching and developing new sensing solutions, which could materially damage our business and financial prospects.

If we fail to accurately forecast our manufacturing requirements and manage our inventory with our contract manufacturers, we could incur additional costs, be required to write-down the value of our inventory and other assets, experience manufacturing delays and lose revenue.

We bear supply risk under our contract manufacturing arrangements. Lead times for the materials and components that our contract manufacturers order on our behalf through different component suppliers vary significantly and depend on numerous factors, including the specific supplier, contract terms and market demand for a component at a given time. Lead times for certain key materials and components incorporated into our products are currently lengthy, requiring our contract manufacturers to order materials and components several months in advance. If we overestimate our production requirements, our contract manufacturers may purchase excess components and build excess inventory. If our contract manufacturers, at our request, purchase excess components that are unique to our products, we could be required to pay for these excess components. If we incur costs to cover excess supply commitments our business and financial prospects could be harmed.

Conversely, if we underestimate our requirements, our contract manufacturers may have inadequate component inventory, which could interrupt the manufacturing of our products and result in delays or cancellation of orders from distributors and customers. If we fail to accurately forecast our manufacturing requirements, our business and financial prospects could be harmed.

Our products incorporate key components, including computer chips, from sole source suppliers and if our contract manufacturers are unable to source these components on a timely basis, due to fabrication capacity issues or other material supply constraints, or if there are interruptions in our, or our contract manufacturers’, relationships with these third-party suppliers, we will not be able to deliver our products to our distributors and customers which would adversely impact our business.*

We depend on sole source suppliers for key components in our products. These sole source suppliers could be constrained by fabrication capacity issues or material supply issues, stop producing such components, cease operations or be acquired by, or enter into exclusive arrangements with, our competitors or other companies. In many cases, we do not have long-term supply agreements

with these suppliers. Instead, our contract manufacturers typically purchase the components required to manufacture our products on a purchase order basis. As a result, most of these suppliers can stop selling to us at any time, requiring us to find another source, or can raise their prices, which could impact our gross margins. Any such interruption or delay may force us to seek similar components from alternative sources, which may not be available.

Our reliance on sole source suppliers involves a number of additional risks, including risks related to:

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supplier capacity constraints;

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price increases;

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timely delivery;

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component quality; and

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delays in, or the inability to execute on, a supplier roadmap for components and technologies.

We have a global supply chain and the COVID-19 pandemic, Russia’s aggression in Ukraine and other macroeconomic factors may adversely affect our ability to source components in a timely or cost-effective manner from our third-party suppliers due to, among other things, work stoppages or interruptions. In addition, the lead times associated with certain components are lengthy and preclude rapid changes in quantities and delivery schedules. We have in the past experienced, and may in the future experience, component shortages and price fluctuations of key components and materials, and the predictability of the availability and pricing of these components may be limited. Component shortages or pricing fluctuations could be material in the future. In the event of a component shortage, supply interruption, or a material pricing change from suppliers of these components, we may not be able to develop alternate sources in a timely manner, or at all, especially in the case of sole or limited source items. Developing alternate sources of supply for these components may be time-consuming, difficult, and costly and we may not be able to source these components on terms that are acceptable to us, or at all, which may undermine our ability to meet our requirements or to fill customer orders in a timely manner. Any interruption or delay in the supply of any parts or components, or the inability to obtain parts or components from alternate sources at acceptable prices and within a reasonable amount of time, would adversely affect our ability to meet our scheduled product deliveries to our customers. This could adversely affect our relationships with our customers and partners and could cause delays in shipment of our products and adversely affect our operating results.

Our manufacturing costs may remain elevated and result in a market price for our products above the price that customers are willing to pay.

If the cost of manufacturing our LiDAR products remains high, we will be forced to charge our customers a high price for the product in order to cover our costs and earn a profit. While we expect our products will benefit from significant cost reduction over time from scale and planned redesigns, there is no guarantee that these efforts will be successful, or that these savings won’t be offset by additional required content. If the price of our products is too high, customers may be reluctant to purchase our products, especially if lower priced alternative products are available, and we may not be able to sell our products in sufficient volumes to recover our costs of development and manufacture or to earn a profit.

Our suppliers could raise prices on key components, which may adversely affect our profitability.

Significant increases in the cost of certain components used in our products, to the extent they are not timely reflected in the price we charge our customers, could materially and adversely impact our results. For example, we have experienced significant increases in prices for certain electronic components, as well as significantly increased lead times. We sought to address these increases by carrying safety stock of critical components, evaluating alternative components, suppliers and processes, reviewing component substitution opportunities, and aggressively negotiating larger quantities with our vendors to ensure adequate supply. Certain of our key component manufacturers and suppliers have the ability, in our contracts, to periodically increase their prices. Accordingly, we cannot assure you that we will not face increased prices in the future or, if we do, whether we will be effective in containing margin pressures from any further component price increases.

Components used in our sensors may fail as a result of manufacturing, design or other defects over which we have no control and render our devices permanently inoperable.

We rely on third-party component suppliers to provide certain functionalities needed for the operation and use of our devices. Any errors or defects in such third-party technology could result in errors in our sensors that could harm our business. If these components have a manufacturing, design or other defect, they can cause our sensors to fail and render them permanently inoperable. As a result,

we may have to replace these sensors at our sole cost and expense. Should we have a widespread problem of this kind, our reputation in the market could be adversely affected and our replacement of these sensors would harm our business.

Our sensors and sensing systems are highly technical and could be vulnerable to hardware errors or software bugs, which may harm our reputation and our business.

Bugs and errors could diminish performance, create security vulnerabilities, affect data quality in logs or interfere with interpretation of data, and cause malfunctions or even permanently disabled sensors. Some errors may only be detected under certain circumstances or after extended use. We update our software and firmware on a regular basis, in spite of extensive quality screening, if a bug were to occur in the process of an update, it could result in devices becoming inoperable or permanently disabled.

We offer a limited warranty on all sensors and any such defects discovered in our products could result in loss of revenue or delay in revenue recognition, loss of customer goodwill and increased service costs, any of which could harm our business, operating results and financial condition. We could also face claims for product or information liability, tort or breach of warranty. Defending a lawsuit, regardless of its merit, is costly and may divert management’s attention and adversely affect the market’s perception of us and our devices. In addition, if our business liability insurance coverage proves inadequate or future coverage is unavailable on acceptable terms or at all, our business could be harmed.

We may incur significant direct or indirect liabilities in connection with our product warranties which could adversely affect our business and operating results.

We typically offer a limited product warranty that requires our products to conform to the applicable specifications and be free from defects in materials and workmanship for a limited warranty period. As a result of increased competition and changing standards in our target markets, we may be required to increase our warranty period length and the scope of our warranty. To be competitive, we may be required to implement these increases before we are able to determine the economic impact of an increase. Accordingly, we may be at risk that any such warranty increase could result in foreseeable and unforeseeable losses for the Company.

Risks Related to Intellectual Property

If we fail to protect or enforce our intellectual property or proprietary rights, our business and operating results could be harmed.*

We regard the protection of our patents, trade secrets, copyrights, trademarks, trade dress, domain names and other intellectual property or proprietary rights as critical to our success. We strive to protect our intellectual property rights by relying on federal, state and common law rights, as well as contractual restrictions. We seek to protect our confidential proprietary information, in part, by entering into confidentiality agreements and invention assignment agreements with all our employees, consultants, advisors and any third parties who have access to our proprietary know-how, information or technology. However, we cannot be certain that we have executed such agreements with all parties who may have helped to develop our intellectual property or who had access to our proprietary information, nor can we be certain that our agreements will not be breached. Any party with whom we have executed such an agreement could potentially breach that agreement and disclose our proprietary information, including our trade secrets, and we may not be able to obtain adequate remedies for such breaches. We cannot guarantee that our trade secrets and other confidential proprietary information will not be disclosed or that competitors will not otherwise gain access to our trade secrets or independently develop substantially equivalent information and techniques. Detecting the disclosure or misappropriation of a trade secret and enforcing a claim that a party illegally disclosed or misappropriated a trade secret is difficult, time- consuming and could result in substantial costs and the outcome of such a claim is unpredictable. Further, the laws of certain foreign countries do not protect proprietary rights to the same extent or in the same manner as the laws of the United States. As a result, we may encounter significant problems in protecting and defending our intellectual property or proprietary rights both in the United States and abroad. If we are unable to prevent the disclosure of our trade secrets to third parties, or if our competitors independently develop any of our trade secrets, we may not be able to establish or maintain a competitive advantage in our market, which could harm our business.

We have 25 technology patents granted and have filed an additional two applications and will in the future file patent applications on inventions that we deem to be innovative. There is no guarantee that our patent applications will be issued as granted patents, that the scope of the protection gained will be sufficient or that an issued patent may subsequently be deemed invalid or unenforceable. Patent laws, and scope of coverage afforded by them, have recently been subject to significant changes, such as the change to “first-to-file” from “first-to-invent” resulting from the Leahy-Smith America Invents Act. This change in the determination of inventorship may result in inventors and companies having to file patent applications more frequently to preserve rights in their inventions, which may favor larger competitors that have the resources to file more patent applications. Another change to the patent laws may incentivize third parties to challenge any issued patent in the United States Patent and Trademark Office (the “USPTO”), as opposed to having to

bring such an action in U.S. federal court. Any invalidation of a patent claim could have a significant impact on our ability to protect the innovations contained within our devices and could harm our business.

The USPTO and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other provisions to maintain patent applications and issued patents. We may fail to take the necessary actions and to pay the applicable fees to obtain or maintain our patents. Non-compliance with these requirements can result in abandonment or lapse of a patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. In such an event, competitors might be able to use our technologies and enter the market earlier than would otherwise have been the case.

We pursue the registration of our domain names, trademarks and service marks in the United States and in certain locations outside the United States. We are seeking to protect our trademarks, patents and domain names in an increasing number of jurisdictions, a process that is expensive and time-consuming and may not be successful or which we may not pursue in every location.

Litigation may be necessary to enforce our intellectual property or proprietary rights, protect our trade secrets or determine the validity and scope of proprietary rights claimed by others. Any litigation of this nature, regardless of outcome or merit, could result in substantial costs, adverse publicity or diversion of management and technical resources, any of which could adversely affect our business and operating results. If we fail to maintain, protect and enhance our intellectual property or proprietary rights, our business may be harmed.

We are currently involved in patent litigation proceedings with Velodyne in the Northern District of California.

Third parties, including Velodyne (referenced in preceding risk factor) have asserted, and may in the future assert, that we have infringed, misappropriated or otherwise violated their intellectual property rights. As we face increasing competition, the possibility of intellectual property rights claims against us will grow. Plaintiffs who have no relevant product revenue may not be deterred by our own issued patents and pending patent applications in bringing intellectual property rights claims against us. The cost of patent litigation or other proceedings, even if resolved in our favor, could be substantial. Some of our competitors may be better able to sustain the costs of such litigation or proceedings because of their substantially greater financial resources. Patent litigation and other proceedings may also require significant management time and divert management from our business. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could impair our ability to compete in the marketplace. The occurrence of any of the foregoing could harm our business.

As a result of intellectual property infringement claims, or to avoid potential claims, we may choose or be required to seek licenses from third parties. These licenses may not be available on commercially reasonable terms, or at all. Even if we are able to obtain a license, the license would likely obligate us to pay license fees or royalties or both, and the rights granted to us might be nonexclusive, with the potential for our competitors to gain access to the same intellectual property. In addition, the rights that we secure under intellectual property licenses may not include rights to all of the intellectual property owned or controlled by the licensor, and the scope of the licenses granted to us may not include rights covering all of the products and services provided by us and our licensees. Furthermore, an adverse outcome of a dispute may require us to pay damages, potentially including treble damages and attorneys’ fees, if we are found to have willfully infringed a party’s intellectual property; cease making, licensing or using technologies that are alleged to infringe or misappropriate the intellectual property of others; expend additional development resources to redesign our solutions; enter into potentially unfavorable royalty or license agreements in order to obtain the right to use necessary technologies, content or materials; and to indemnify our partners and other third parties. In addition, any lawsuits regarding intellectual property

rights, regardless of their success, could be expensive to resolve and would divert the time and attention of our management and technical personnel.

In addition to patented technology, we rely on our unpatented proprietary technology, trade secrets, designs, experiences, work flows, data, processes, software and know-how.

We rely on proprietary information (such as trade secrets, know-how and confidential information) to protect intellectual property that may not be patentable or subject to copyright, trademark, trade dress or service mark protection, or that we believe is best protected by means that do not require public disclosure. We generally seek to protect this proprietary information by entering into confidentiality agreements, or consulting, services or employment agreements that contain non-disclosure and non-use provisions with our employees, consultants, contractors and third parties. However, we may fail to enter into the necessary agreements, and even if entered into, these agreements may be breached or may otherwise fail to prevent disclosure, third-party infringement or misappropriation of our proprietary information, may be limited as to their term and may not provide an adequate remedy in the event of unauthorized disclosure or use of proprietary information. We have limited control over the protection of trade secrets used by our current or future manufacturing partners and suppliers and could lose future trade secret protection if any unauthorized disclosure of such information occurs. In addition, our proprietary information may otherwise become known or be independently developed by our competitors or other third parties. To the extent that our employees, consultants, contractors, advisors and other third parties use intellectual property owned by others in their work for us, disputes may arise as to the rights in related or resulting know-how and inventions. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain protection for our proprietary information could adversely affect our competitive business position. Furthermore, laws regarding trade secret rights in certain markets where we operate may afford little or no protection to its trade secrets.

We also rely on physical and electronic security measures to protect our proprietary information, but we cannot provide assurance that these security measures will not be breached or provide adequate protection for our property. There is a risk that third parties may obtain and improperly utilize our proprietary information to our competitive disadvantage. We may not be able to detect or prevent the unauthorized use of such information or take appropriate and timely steps to enforce our intellectual property rights.

If we are unable to obtain necessary or desirable third-party technology licenses, our ability to develop new products or enhancements may be impaired.

We utilize commercially available off-the-shelf technology in the development of our devices. As we continue to introduce new features or improvements, we may be required to license additional technologies from third parties. These third-party licenses may be unavailable to us on commercially reasonable terms, if at all. If we are unable to obtain necessary third-party licenses, we may be required to obtain substitute technologies with lower quality or performance standards, or at a greater cost, any of which could harm the competitiveness of our business.

Under certain of our agreements, we are required to provide indemnification in the event our technology is alleged to infringe upon the intellectual property rights of third parties.

In certain of our agreements we indemnify our licensees, manufacturing partners and suppliers. We could incur significant expenses defending these partners if they are sued for patent infringement based on allegations related to our technology. In addition, if a partner were to lose a lawsuit and in turn seek indemnification from us, we could be subject to significant monetary liabilities. While such contracts typically give us multiple remedies for addressing instances of infringements, such remedies (e.g. product modification, purchase of licenses) could be expensive and difficult to administer.

Risks Related to Compliance

We may become involved in legal and regulatory proceedings and commercial or contractual disputes, which could have an adverse effect on our profitability and financial position.

We may be, from time to time, involved in litigation, regulatory proceedings and commercial or contractual disputes that may be significant. These matters may include, without limitation, disputes with our suppliers and customers, intellectual property claims, stockholder litigation, government investigations, class action lawsuits, personal injury claims, environmental issues, customs and VAT disputes and employment and tax issues. In addition, we have in the past and could face in the future a variety of labor and employment claims against us, related to, but not limited to, general employment practices and wrongful acts. In such matters, private parties or other entities may seek to recover from us indeterminate amounts in penalties or monetary damages. These types of lawsuits could require significant management time and attention or could involve substantial legal liability, and/or substantial expenses to defend. Often these cases raise complex factual and legal issues and create risks and uncertainties. No assurances can be given that

any proceedings and claims will not have a material adverse impact on our consolidated financial position or that our established reserves or our available insurance will mitigate this impact.

We manufacture and sell products that contain electronic components, and such components may contain materials that are subject to government regulation in both the locations where we manufacture and assembles our products, as well as the locations where we sell our products. For example, certain regulations limit the use of lead in electronic components. Since we operate on a global basis, this is a complex process which requires continuous monitoring of regulations and an ongoing compliance process to ensure that we, and our suppliers, are in compliance with all existing regulations. If there is an unanticipated new regulation that significantly impacts our use of various components or requires more expensive components, that regulation could materially adversely affect our business, results of operations and financial condition.

Some of our customers may also require that we comply with their own unique requirements relating to these matters.

Our products are designed to meet the compliance requirements for the applicable use and in the majority of geographies. There is possibility that some customers may require us to comply with their unique requirements for some specific applications or for their region that have additional regulatory requirements. Any requirements for customization or modification would likely increase our time-to-market for such products which could materially adversely impact our business, results of operations and financial condition.

We are subject to various environmental laws and regulations that could impose substantial costs upon us.

Environmental pollution and climate change have been the subject of significant legislative and regulatory efforts on a global basis, and we believe this will continue both in scope and in the number of countries participating. In addition, as climate change issues become more prevalent, foreign, federal, state and local governments and our customers have increased their focus on environmental sustainability, which may result in new regulations and customer requirements, which could materially adversely impact our business, results of operations and financial condition. If we are unable to effectively address concerns about environmental impact, our reputation could be negatively impacted, and our business, results of operations or financial condition could suffer.

Any new or modified environmental regulations or laws may increase the cost of raw materials or components we use in our products. Environmental regulations require us to continually reduce product energy usage, monitor and exclude an expanding list of restricted substances and to participate in required recovery and recycling of our products. Environmental and health and safety laws and regulations can be complex, and we have limited experience complying with them. Capital and operating expenses needed to comply with environmental laws and regulations can be significant, and violations may result in substantial fines and penalties, third-party damages, suspension of production or a cessation of our operations.

Further, if contamination is found at properties we operate or formerly operated, this may result in liability for us under environmental laws and regulations, including the Comprehensive Environmental Response, Compensation and Liability Act, which can impose liability for the full amount of remediation-related costs without regard to fault. Costs of complying with environmental laws and regulations and any claims concerning non-compliance, or liability with respect to contamination in the future, could have a material adverse effect on our financial condition or operating results.

We are subject to U.S. and foreign anti-corruption and anti-money laundering laws and regulations. We can face criminal liability and other serious consequences for violations, which can harm our business.

We are subject to the U.S. Foreign Corrupt Practices Act, the U.S. domestic bribery statute contained in 18 U.S.C. § 201, the U.S. Travel Act, the Money Laundering Control Act 18 U.S.C. §§ 1956 and 1957, and other anti-bribery and anti-money laundering laws in countries in which we conduct activities. Anti-corruption laws are interpreted broadly and prohibit companies and their employees, agents, contractors and other collaborators from authorizing, promising, offering or providing, directly or indirectly, improper payments or anything else of value to recipients in the public or private sector, and require that we keep accurate books and records and maintain internal accounting controls designed to prevent any such actions. We can be held liable for the corrupt or other illegal activities of our employees, agents, contractors and other collaborators, even if we do not explicitly authorize or have actual knowledge of such activities.

As we increase our international cross-border business and expand our operations abroad, we may continue to engage with business partners and third-party intermediaries to market our services and to obtain necessary permits, licenses and other regulatory approvals. In addition, we or our third-party intermediaries may have direct or indirect interactions with officials and employees of government agencies or state-owned or affiliated entities. We can be held liable for the corrupt or other illegal activities of these third-party intermediaries, our employees, representatives, contractors, partners and agents, even if we do not explicitly authorize such activities.

We cannot assure you that all of our employees and agents will not take actions in violation of our policies and applicable law, for which we may be ultimately held responsible. As we increase our international business, our risks under these laws may increase.

Detecting, investigating and resolving actual or alleged violations of anti-corruption laws can require a significant diversion of time, resources and attention from management. In addition, non-compliance with anti- corruption or anti-bribery laws could subject us to whistleblower complaints, investigations, sanctions, settlements, prosecution, enforcement actions, fines, damages, other civil or criminal penalties, injunctions, suspension or debarment from contracting with certain persons, reputational harm, adverse media coverage and other collateral consequences. If any subpoenas are received or investigations are launched, or governmental or other sanctions are imposed, or if we do not prevail in any possible civil or criminal proceeding, our business, operating results and financial condition could be materially harmed.

We are subject to governmental export controls and sanctions laws and regulations that could impair our ability to compete in international markets and subject us to liability if we are not in compliance with applicable laws. Changes to such laws and regulations, as well as changes to trade policy, import laws, and tariffs, may also have a material adverse effect on our business, financial condition and results of operations.

Exports of our products are subject to export controls and sanctions laws and regulations imposed by the U.S. government and administered by the U.S. Departments of State, Commerce, and Treasury. U.S. export control laws may require a license or other authorization to export products to certain destinations and end users. In addition, U.S. economic sanctions laws include restrictions or prohibitions on engaging in any transactions or dealings, including receiving investment or financing from, or engaging in the sale or supply of products and services to, U.S. embargoed or sanctioned countries, governments, persons and entities. Obtaining export authorizations can be difficult, costly and time- consuming and we may not always be successful in obtaining such authorizations, and our failure to obtain required export approval for our products or limitations on our ability to export or sell our products imposed by export control or sanctions laws may harm our revenues and adversely affect our business, financial condition, and results of operations. Non-compliance with these laws could have negative consequences, including government investigations, penalties and reputational harm.

Further, any changes in global political, regulatory and economic conditions, such as the military conflict involving Russia and Ukraine and the sanctions imposed by the United States, United Kingdom, European Union, and other jurisdictions on Russia in response to such conflict, or in laws and policies governing import/export control, economic sanctions, manufacturing, development and investment in the territories or countries where we currently purchase our components, sell our products, or conduct our business could result in the decreased use of our products by, or in our decreased ability to export or sell our products to, existing or potential end-customers. Any decreased use of our products or limitation on our ability to export or sell our products would adversely affect our business, results of operations and growth prospects. The United States has recently instituted or proposed changes in trade policies that include the negotiation or termination of trade agreements, the imposition of higher tariffs on imports into the United States, economic sanctions on individuals, corporations or countries, and other government regulations affecting trade between the United States and other countries where we conduct our business. A number of other nations have proposed or instituted similar measures directed at trade with the United States in response. As a result of these developments, there may be greater restrictions and economic disincentives on international trade that could adversely affect our business. It may be time-consuming and expensive for us to alter our business operations to adapt to or comply with any such changes, and any failure to do so could have a material adverse effect on our business, financial condition and results of operations.

Failures, or perceived failures, to comply with privacy, data protection, and information security requirements in the variety of jurisdictions in which we operate may adversely impact our business, and such legal requirements are evolving, uncertain and may require improvements in, or changes to, our policies and operations.

Our current and potential future operations and sales subject us to laws and regulations addressing privacy and the collection, use, storage, disclosure, transfer and protection of a variety of types of data. For example, the European Commission has adopted the General Data Protection Regulation and California enacted the California Consumer Privacy Act of 2018, both of which provide for potentially material penalties for non-compliance. These regimes may, among other things, impose data security requirements, disclosure requirements, and restrictions on data collection, uses, and sharing that may impact our operations and the development of our business. While, generally, we do not have access to, collect, store, process, or share information collected by our solutions unless our customers choose to proactively provide such information to us, our products may evolve both to address potential customer

requirements or to add new features and functionality. Therefore, the full impact of these privacy regimes on our business is rapidly evolving across jurisdictions and remains uncertain at this time.

We may also be affected by cyber-attacks and other means of gaining unauthorized access to its products, systems, and data. For instance, cyber criminals or insiders may target us or third-parties with which we have business relationships in an effort to obtain data, or in a manner that disrupts our operations or compromises our products or the systems into which our products are integrated.

We are assessing the continually evolving privacy and data security regimes and measures we believe are appropriate in response. Since these data security regimes are evolving, uncertain and complex, especially for a global business like ours, we may need to update or enhance our compliance measures as our products, markets and customer demands further develop and these updates or enhancements may require implementation costs. The compliance measures we do adopt may prove ineffective. Any failure, or perceived failure, by us to comply with current and future regulatory or customer-driven privacy, data protection, and information security requirements, or to prevent or mitigate security breaches, cyber-attacks, or improper access to, use of, or disclosure of data, or any security issues or cyber-attacks affecting us, could result in significant liability, costs (including the costs of mitigation and recovery), and a material loss of revenue resulting from the adverse impact on our reputation and brand, loss of proprietary information and data, disruption to our business and relationships, and diminished ability to retain or attract customers and business partners. Such events may result in governmental enforcement actions and prosecutions, private litigation, fines and penalties or adverse publicity, and could cause customers and business partners to lose trust in us, which could have an adverse effect on our reputation and business.

Our use of open source software could impose limitations on our ability to commercialize our products.

We incorporate open source software in our products. While we are careful to use only those permissive licenses whose terms of use are well known, from time to time, companies that incorporate open source software into their products have faced claims challenging the ownership of open source software and/or compliance with open source license terms. Therefore, we could be subject to suits by parties claiming ownership of what we believe to be open source software or non-compliance with open source licensing terms. Although we monitor our use of open source software, the terms of many open source software licenses have not been interpreted by U.S. courts, and there is a risk that such licenses could be construed in a manner that could impose unanticipated conditions or restrictions on our ability to sell our products. In such event, we could be required to make our proprietary software generally available to third parties, including competitors, at no cost, to seek licenses from third parties in order to continue offering our devices, to re-engineer our devices or to discontinue the sale of our products in the event re-engineering cannot be accomplished on a timely basis or at all, any of which could harm our business.

If we fail to comply with the laws and regulations relating to the collection of sales tax and payment of income taxes in the various states in which we do business, we could be exposed to unexpected costs, expenses, penalties and fees as a result of our non-compliance, which could harm our business.

By engaging in business activities in the United States, we become subject to various state laws and regulations, including requirements to collect sales tax from our sales within those states, and the payment of income taxes on revenue generated from activities in those states. A successful assertion by one or more states that we were required to collect sales or other taxes or to pay income taxes where we did not could result in substantial tax liabilities, fees and expenses, including substantial interest and penalty charges, which could harm our business.

The PRC government exerts substantial influence and discretion over the manner in which companies incorporated under the laws of PRC conduct their business activities. We are a Delaware corporation headquartered in Sunnyvale, California, which, through our subsidiaries, conducts limited activities in China and is not subject to such influence by the PRC government. However, if we were to become subject to such direct influence or discretion, it may result in a material change in our operations and/or the value of its securities, which would materially affect the interest of our investor.

We have only limited sales support activities in China, comprising only the maintenance of a sales office through a subsidiary incorporated under the laws of the PRC. This Chinese subsidiary does not generate any revenue, other than revenue calculated on a cost-plus basis from support costs, which is eliminated through inter-company consolidation. All of our sales to customers in China and Hong Kong are conducted through Quanergy Systems, Inc., the Chinese subsidiary’s ultimate parent company, which is a

Delaware corporation headquartered in Sunnyvale, California. Our principal executive offices are located, and we principally operate, in the United States.

The PRC government currently does not exert direct influence and discretion over the manner in which we conduct our business operations outside of China, however, there is no guarantee that we will not be subject to such direct influence or discretion in the future due to changes in laws or other unforeseeable reasons or our expansion of operations in China.

The PRC legal system is evolving rapidly and the PRC laws, regulations, and rules may change quickly with little advance notice. In particular, because these laws, rules and regulations are relatively new, and because of the limited number of published decisions and the non-precedential nature of these decisions, the interpretation of these laws, rules and regulations may contain inconsistences, the enforcement of which involves uncertainties. The PRC government has exercised and continues to exercise substantial control over many sectors of the PRC economy through regulation and/or state ownership. Government actions have had, and may continue to have, a significant effect on economic conditions in the PRC and businesses, which are subject to such government actions.

If we were to become subject to the direct intervention or influence of the PRC government at any time due to changes in laws or other unforeseeable reasons or as a result of our expansion of operations in China, it may require a material change in our operations and/or result in increased costs necessary to comply with existing and newly adopted laws and regulations or penalties for any failure to comply. In addition, the prices of our securities could be adversely affected as a result of anticipated negative impacts of any such government actions, as well as negative investor sentiment towards companies subject to direct PRC government oversight and regulation, regardless of our actual operating performance. There can be no assurance that the Chinese government would not intervene in or influence our business operations in China at any time.

We are not currently required to obtain permission from the PRC government, including the China Securities Regulatory Commission (“CSRC”) or Cyberspace Administration of China (“CAC”), to list on a U.S. securities exchange. However, there is no guarantee that this will continue to be the case in the future in relation to the continued listing of our securities on a securities exchange outside of the PRC, or even when such permission is obtained, it will not be subsequently denied or rescinded.

Any actions by the PRC government to exert more oversight and control over offerings that are conducted overseas and/or foreign investments in issuers could significantly limit or completely hinder our ability to offer or continue to offer securities to investors and cause the value of our securities, including its common stock, to significantly decline or be worthless.

If the Chinese laws and other obligations relating to cybersecurity and data protection were to apply to our business operations in China, failure to comply with any of them may result in proceedings against us by Chinese government authorities or others and harm our public image and reputation, which could materially and adversely affect our business, financial condition, and results of operations.

We have only limited sales support activities in mainland China, comprising only the maintenance of a sales office through a subsidiary incorporated under the laws of the PRC. This Chinese subsidiary does not generate any revenue, other than revenue calculated on a cost-plus basis from support costs, which is eliminated through inter-company consolidation. All of our sales to customers in China and Hong Kong are conducted through our subsidiary, Quanergy Perception Technologies, Inc., the Chinese subsidiary’s ultimate parent company, which is a Delaware corporation headquartered in Sunnyvale, California. Our principal executive offices are located, and we principally operate, in the United States. We do not believe that currently the laws and other obligations relating to cybersecurity and data protection issued by the Cyberspace Administration of China, including the Measures for Cybersecurity Censorship (Revised Draft for Comments) and PRC Data Security Law, apply to or have impact us or our business operations in China.

Currently, the period for public comment on the draft measures has ended, and the draft measures’ implementation provisions and anticipated adoption or effective date remain substantially uncertain. If, however, the enacted version of the draft measures mandates clearance of cybersecurity review and other specific actions to be completed by Delaware companies like us with subsidiaries organized in China, we may face uncertainties as to whether such clearance can be timely obtained, or at all. Although we have not engaged in any material operations in China, we may face uncertainty as to whether we would be subject to cybersecurity review in the future. Cybersecurity review could result in disruption of our operations in China, negative publicity with respect to our brand name, and diversion of our managerial and financial resources. Furthermore, if we were found to be in violation of applicable laws and regulations in China during such review, we could be subject to government sanctions.

In addition, the PRC Data Security Law requires data collection to be conducted in a legitimate and proper manner, and stipulates that, for the purpose of data protection, data processing activities must be conducted based on data classification and hierarchical protection system for data security. As there remain uncertainties regarding the further interpretation and implementation of those laws and regulations, if they are deemed to be applicable to Delaware companies like us with subsidiaries organized in China, we cannot assure you that we will be compliant with such new regulations in all respects, and we may be ordered to rectify and terminate any actions

that are deemed illegal by the government authorities and become subject to fines and other sanctions, which may materially and adversely affect our business, financial condition, and results of operations.

General Risks

Our limited operating history and evolving business make it difficult to evaluate our current business and future prospects.

Our limited operating history and the evolution of our business and our industry make it difficult to accurately assess our future prospects. It may not be possible to discern fully the economic and other business trends that we are subject to. Elements of our business strategy are new and subject to ongoing development as our operations mature. In addition, it may be difficult to evaluate our business because many of the other companies that offer the same or a similar range of solutions, products and services as us also have limited operating histories and evolving businesses.

The effects of the COVID-19 pandemic have had and could continue to have a material adverse effect on our business prospects, financial results, and results of operations.

The COVID-19 pandemic has caused significant volatility and disruption globally. The COVID-19 measures adopted by governments and businesses, including restrictions on travel and business operations and shelter in place and other quarantine orders, have affected and continue to affect our business, and could continue to adversely affect our business operations or the business operations of our customers and suppliers in the future. A significant portion of our revenue is project driven and has thus been impacted by the COVID-19 pandemic as certain key airport, smart city, and security installations have been, and continue to be, pushed back. Further, the pandemic has slowed prototype work and new product introduction efforts due to employees’ inability to access our facilities, and temporarily disrupted the operations of certain of our customers and suppliers. The duration of the ongoing COVID-19 pandemic and the associated and ongoing business interruptions may continue to affect our sales, supply chain or the manufacture or distribution of products, which could result in a material adverse effect on our business prospects and financial condition. Our response to the ongoing COVID-19 pandemic may prove to be inadequate. We may be unable to continue our operations in the manner that we did prior to the outbreak and we may endure interruptions, reputational harm, delays in product development and shipments, all of which could have an adverse effect on our business prospects, operating results, and financial condition. The COVID-19 pandemic may also intensify or exacerbate other risks described in these Risk Factors.

We may pursue acquisitions, which involve a number of risks, and if we are unable to address and resolve these risks successfully, such acquisitions could harm our business.

We have acquired and may in the future acquire businesses, products or technologies to expand our offerings and capabilities and business. We have evaluated, and expect to continue to evaluate, a wide array of potential strategic transactions. Any acquisition could be material to our financial condition and results of operations and any anticipated benefits from an acquisition may never materialize. In addition, the process of integrating acquired businesses, products or technologies may create unforeseen operating difficulties and expenditures. Acquisitions in international markets would involve additional risks, including those related to integration of operations across different cultures and languages, currency risks and the particular economic, political and regulatory risks associated with specific countries. We may not be able to address these risks successfully, or at all, without incurring significant costs, delays or other operational problems and if we were unable to address such risks successfully our business could be harmed.

If we were to lose the services of members of our senior management team, we may not be able to execute our business strategy.

Our success depends in large part upon the continued service of key members of our senior management team. In particular, each of our Chairman and Chief Executive Officer, Kevin J. Kennedy, Chief Development Officer and Co-Founder, Tianyue Yu, Chief Marketing Officer, Enzo Signore and Chief Financial Officer, Patrick Archambault, is critical to our overall management, as well as the continued development of our LiDAR technology, our culture and our strategic direction. All of our executive officers are at will employees, and we do not maintain any key person life insurance policies. The loss of any member of our senior management team could harm our business.

Our future success depends in part on recruiting and retaining key personnel and if we fail to do so, it may be more difficult for us to execute our business strategy. We are currently a small organization and will need to hire additional qualified personnel to effectively implement our strategic plan, and if we are unable to attract and retain highly qualified employees, we may not be able to continue to grow our business.

Our ability to compete and grow depends in large part on the efforts and talents of our employees. Our employees, particularly engineers and other product developers, are in high demand, and we devote significant resources to identifying, hiring, training, successfully integrating and retaining these employees. As competition with other companies increases, we may incur significant expenses in attracting and retaining high quality software and hardware engineers and other employees. The loss of employees or the inability to hire additional skilled employees as necessary to support the growth of our business and the scale of our operations could

result in significant disruptions to our business, and the integration of replacement personnel could be time-consuming and expensive and cause additional disruptions to our business.

We believe a critical component to our success and our ability to retain our best people is our culture. As we continue to grow, we may find it difficult to maintain our entrepreneurial, execution-focused culture.

Our ability to effectively manage our anticipated growth and expansion of our operations will also require us to enhance our operational, financial and management controls and infrastructure, human resources policies and reporting systems. These enhancements and improvements will require significant capital expenditures and allocation of valuable management and employee resources.

We expect to experience significant growth in the scope and nature of our operations. Our ability to manage our operations and future growth will require us to continue to improve our operational, financial and management controls, compliance programs and reporting systems. We may not be able to implement improvements in an efficient or timely manner and may discover deficiencies in existing controls, programs, systems and procedures, which could have an adverse effect on our business, reputation and financial results. Additionally, rapid growth in our business may place a strain on our human and capital resources. Furthermore, we expect to continue to conduct our business internationally and anticipate increased business operations in the United States, Europe, Asia and elsewhere. These diversified, global operations place increased demands on our limited resources and require us to substantially expand the capabilities of our administrative and operational resources and to attract, train, manage and retain qualified management, technical, manufacturing, engineering, sales and other personnel. As our operations expand domestically and internationally, we will need to continue to manage multiple locations and additional relationships with various customers, partners, suppliers and other third parties across several markets.

If we have difficulty managing our growth in operating expenses, our business could be harmed.

We have recently experienced significant growth in research and development, sales and marketing, support services and operations. While we managed to significantly pare back operating expenses over the last 24 months due to the COVID-19 pandemic, our spending rate has gone up with the non-recurrence of furlough and wage cuts implemented in 2020 as well as due to headcount increases and costs related to the Business Combination. We expect to continue to spend meaningfully on operating activities. We expect future growth will continue to place, significant demands on our management, as well as our financial and operational resources, to:

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manage a larger organization;

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hire more employees, including engineers with relevant skills and experience;

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expand our manufacturing and distribution capacity;

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increase our sales and marketing efforts;

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broaden our customer support capabilities;

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implement appropriate operational and financial systems;

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support the requirements of being a public company;

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expand internationally; and

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maintain effective financial disclosure controls and procedures.

If we fail to manage our growth effectively, we may not be able to execute our business strategies and our business will be harmed.

We incur significantly increased costs as a result of operating as a public company, and our management will be required to devote substantial time to compliance efforts.*

We incur significant legal, accounting, insurance and other expenses as a result of being a public company. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”), and the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), as well as related rules implemented by the SEC, have required changes in corporate governance practices of public companies. In addition, rules that the SEC is implementing or is required to implement pursuant to the Dodd-Frank Act are expected to require additional changes. We expect that compliance with these and other similar laws, rules and regulations, including compliance with Section 404 of the Sarbanes-Oxley Act, will substantially increase our expenses, including legal and accounting costs, and make some activities more time-consuming and costly. We also expect these laws, rules and regulations to make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage, which may make it more difficult for us to attract and retain

qualified persons to serve on our board of directors or as officers. Although the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”) may, for a limited period of time, somewhat lessen the cost of complying with these additional regulatory and other requirements, we nonetheless expect a substantial increase in legal, accounting, insurance and certain other expenses in the future, which will negatively impact our results of operations and financial condition.

We qualify as an emerging growth company within the meaning of the Securities Act, as modified by the JOBS Act, and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. As a result, our shareholders may not have access to certain information they may deem important. We could remain an emerging growth company for up to five years from the date of CCAC’s IPO, although circumstances could cause us to lose that status earlier, including if the market value of our shares of Common Stock held by non-affiliates exceeds $700,000,000 as of any June 30 before that time, in which case we would no longer be an emerging growth company as of the following December 31. We cannot predict whether investors will find our securities less attractive because we rely on these exemptions. If some investors find our securities less attractive as a result of our reliance on these exemptions, the trading prices of our securities may be lower than they otherwise would be, there may be a less active trading market for our securities and the trading prices of our securities may be more volatile.

Further, Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such an election to opt out is irrevocable. We have elected not to opt out of such extended transition period which means that when a standard is issued or revised and it has different application dates for public or private companies, we, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make comparison of our financial statements with another public company which is neither an emerging growth company nor an emerging growth company which has opted out of using the extended transition period difficult or impossible because of the potential differences in accounting standards used.

If we fail to maintain an effective system of internal controls, our ability to produce timely and accurate financial statements or comply with applicable regulations could be adversely affected.*

Our management is responsible for establishing and maintaining adequate internal control over financial reporting and for evaluating and reporting on the effectiveness of our system of internal control. Our internal controls over financial reporting is a process designed to provide reasonable assurances regarding the reliability of our financial reporting and the preparation of financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States. As a public company, we are required to comply with the Sarbanes-Oxley Act and other rules that govern public companies.

If we fail to maintain an effective system of internal controls, the accuracy and timing of our financial reporting may be adversely affected, our liquidity, our access to capital markets may be adversely affected, we may be unable to maintain or regain compliance with applicable securities laws, and the New York Stock Exchange listing requirements (should we remain listed following the resolution of the recent delisting determination instituted by the staff of NYSE Regulation), we may be subject to regulatory investigations and penalties, investors may lose confidence in our financial reporting, and our stock price may decline.

Our management concluded that we identified a material weakness in our internal controls over financial reporting related to the Company’s accounting for complex financial instruments. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented, or detected and corrected on a timely basis.

Effective internal controls are necessary for us to provide reliable financial reports and prevent fraud. We continue to evaluate steps to remediate the material weakness. These remediation measures may be time consuming and costly and there is no assurance that these initiatives will ultimately have the intended effects.

If we identify any new material weaknesses in the future, any such newly identified material weakness could limit our ability to prevent or detect a misstatement of our accounts or disclosures that could result in a material misstatement of our annual or interim financial statements. In such case, we may be unable to maintain compliance with securities law requirements regarding timely filing of periodic reports in addition to applicable stock exchange listing requirements, investors may lose confidence in our financial reporting and our stock price may decline as a result. We cannot assure you that the measures we have taken to date, or any measures we may take in the future, will be sufficient to avoid potential future material weaknesses.

We may face litigation and other risks as a result of the material weakness in our internal control over financial reporting.

As a result of the material weaknesses in CCAC’s internal control over financial reporting and the change in accounting for the public shares, we potentially face litigation or other disputes which may include, among others, claims invoking the federal and state securities laws, contractual claims or other claims arising from the material weaknesses and the preparation of our financial statements. As of the date of this Quarterly Report on Form 10-Q, we have no knowledge of any such litigation or dispute. However, we can provide no assurance that such litigation or dispute will not arise in the future. Any such litigation or dispute, whether successful or not, could have a material adverse effect on our business, results of operations and financial condition.

Our business is subject to the risks of earthquakes, fire, floods and other natural catastrophic events, global pandemics, and interruptions by man-made problems, such as network security breaches, computer viruses or terrorism. Material disruptions of our business or information systems resulting from these events could adversely affect our operating results.

We and some of the third-party service providers on which we depend for various support functions are vulnerable to damage from catastrophic events, such as power loss, natural disasters, terrorism, pandemics, and similar unforeseen events beyond our control.

If a natural disaster, power outage or other event occurred that prevented us from using all or a significant portion of our headquarters, damaged critical infrastructure, or otherwise disrupted operations, it may be difficult or, in certain cases, impossible for us to continue our business for a substantial period of time. The disaster recovery and business continuity plans we have in place are unlikely to provide adequate protection in the event of a serious disaster or similar event. We may incur substantial expenses as a result of the limited nature of our disaster recovery and business continuity plans, which could have a material adverse effect on our business.

Furthermore, integral parties in our supply chain are operating from single sites, increasing their vulnerability to natural disasters or other sudden, unforeseen and severe adverse events, such as the COVID-19 pandemic. If such an event were to affect our supply chain, it could have a material adverse effect on our business.

Our ability to use our net operating loss carryforwards may be limited.

As of December 31, 2021, we had U.S. federal and state net operating loss carryforwards of approximately $204.7 million and $151.1 million, respectively. Under legislation enacted in 2017, informally titled the Tax Cuts and Jobs Act (the “TCJA”) as modified in 2020 by the Coronovirus Aid, Relief, and Economic Security Act (the "CARES Act"), unused U.S. federal net operating losses generated in tax years beginning after December 31, 2017, will not expire and may be carried forward indefinitely, but the deductibility of such federal net operating loss carryforwards in taxable years beginning after December 31, 2020, is limited to 80% of taxable income. It is uncertain if and to what extent various states will conform to the TCJA or the CARES Act. Our ability to utilize our federal net operating carryforwards may be limited under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”). The limitations apply if we experience an “ownership change,” which is generally defined as a greater than 50 percentage point change (by value) in the ownership of our equity by certain stockholders or groups of stockholders over a rolling three-year period. Similar provisions of state tax law may also apply to limit the use of our state net operating loss carryforwards. We have not yet completed a Section 382 analysis, and therefore, there can be no assurances that any previously experienced ownership changes have not materially limited our utilization of affected net operating loss carryforwards. Future changes in our stock ownership, including as a result of this offering, which may be outside of our control, may trigger an ownership change that materially impacts our ability to utilize pre-change net operating loss carryforwards. In addition, there may be periods during which the use of net operating loss carryforwards is suspended or otherwise limited.

Our management has limited experience in operating a public company.

Our executive officers have limited experience in the management of a publicly traded company subject to significant regulatory oversight and reporting obligations under federal securities laws. Our management team may not successfully or effectively manage our transition to a public company. Their limited experience in dealing with the increasingly complex laws pertaining to public companies could be a significant disadvantage in that it is likely that an increasing amount of their time may be devoted to these activities which will result in less time being devoted to our management and growth. We may not have adequate personnel with the appropriate level of knowledge, experience and training in the accounting policies, practices or internal controls over financial

reporting required of public companies in the United States. It is possible that we will be required to expand our employee base and hire additional employees to support our operations as a public company, which will increase our operating costs in future periods.

A minority owner of one of our significant stockholders is the subject to economic sanctions imposed by the US government. Recent media attention to this fact may be received unfavorably by our stockholders and our stock price could decline.*

In January 2018, pursuant to the Countering America’s Adversaries through Sanctions Act of 2017, the U.S. administration presented the U.S. Congress with a report on senior Russian political figures, “oligarchs” and “parastatal” entities. The list included the 96 wealthiest Russian businessmen, including Mr. Alisher Usmanov, who maintains a minority, but nevertheless significant ownership interest in Rising Tide V, LLC (“Rising Tide”). Rising Tide initially acquired stock in the Company in December 2015. In March 2022, in response to Russia’s invasion of Ukraine, the U.S. Department of the Treasury designated Mr. Usmanov as a Specially Designated National and Blocked Person pursuant to the Russian Harmful Foreign Activities Sanctions Regulations (31 CFR part 587 (“RuHSR”)). Contemporaneous with Mr. Usmanov’s designation, the Department of the Treasury’s Office of Foreign Assets Control issued General License No. 15, which authorizes all transactions prohibited under the RuHSR involving entities owned, directly or indirectly, 50% or more by Mr. Usmanov (provided that such entities are not themselves sanctioned entities). The general license also unblocked all property and property interests of such entities.

In October 2022, the Wall Street Journal published an article identifying Mr. Usmanov’s indirect investment in the Company. The article was missing key facts, including any reference to General License No. 15, the fact that Quanergy is not subject to any sanctions and the fact that Rising Tide’s initial investment in the Company predated the Russian invasion of Ukraine by several years. Nevertheless, the media attention may be seen negatively by our stockholders. This could motivate stockholders to sell their Quanergy stock or to not invest in our securities, which could cause the price of our stock to decline and could have a material adverse effect on our ability to access financing in the U.S. debt and equity markets.

Risks Related to Investing in Our Securities

The market price and trading volume of our Common Stock and warrants may be volatile and could decline significantly.*

The stock markets, including NYSE on which we have listed the shares of our Common Stock under the symbol “QNGY” and our public warrants under the symbol “QNGY WS,” and the over-the-counter markets where our Common Stock and public warrants are currently traded, have from time to time experienced significant price and volume fluctuations. Even if an active, liquid and orderly trading market is sustained for our securities, the market price of our securities may be volatile and could decline significantly. During the period from the closing of the Business Combination through November 10, 2022, the market price for our Common Stock was between $.27 and $141.00. In addition, the trading volume in our securities may fluctuate and cause significant price variations to occur. If the market price of our securities declines significantly, you may be unable to resell your securities at or above the price at which you purchased our securities. We cannot assure you that the market price of our securities will not fluctuate widely or decline significantly in the future in response to a number of factors, including, among others, the following:

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the realization of any of the risk factors presented in this Quarterly Report;

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actual or anticipated fluctuations in our quarterly financial results or the quarterly financial results of companies perceived to be similar to us;

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changes in the market’s expectations about our operating results;

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our operating results failing to meet the expectation of securities analysts of investors in a particular period;

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operating and share price performance of other companies that investors deem comparable to us;

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the volume of shares of Common Stock available for public sale;

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future issuances, sales, resales or repurchases or anticipated issuances, sales, resales or repurchases of our securities;

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our ability to effectively service any current and future outstanding debt obligations;

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the announcement of new services or enhancements by us or our competitors;

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developments concerning intellectual property rights;

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changes in legal, regulatory and enforcement frameworks impacting our business;

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changes in the prices of our services;

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announcements by us or our competitors of significant business developments, acquisitions or new offerings;

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our involvement in any litigation;

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changes in senior management or key personnel;

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changes in the anticipated future size and growth rate of our market;

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actual or perceived data security incidents or breaches;

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any delisting of our Common Stock or warrants from NYSE due to any failure to meet listing requirements;

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actual or anticipated variations in quarterly operating results;

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our failure to meet the estimates and projections of the investment community or that we may otherwise provide to the public;

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publication of research reports about us or our industry or positive or negative recommendations or withdrawal of research coverage by securities analysts;

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changes in the market valuations of similar companies;

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overall performance of the equity markets;

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speculation in the press or investment community;

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sales of Common Stock by us or our stockholders in the future;

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the effectiveness of our internal control over financial reporting;

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general political and economic conditions, including health pandemics, such as COVID-19; and

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other events or factors, many of which are beyond our control.

In the past, securities class-action litigation has often been instituted against companies following periods of volatility in the market price of their securities. This type of litigation could result in substantial costs and divert our management’s attention and resources, which could have a material adverse effect on us.

Our Common Stock and public warrants have been suspended from trading on, and may be delisted from, the NYSE and are not listed on any other national securities exchange.*

On November 8, 2022, we received a letter from the staff of NYSE Regulation notifying us that it had determined to commence proceedings to delist our Common Stock and public warrants. Trading in these securities was suspended after the market close on the NYSE on November 8, 2022. NYSE Regulation reached its decision to delist these securities pursuant to Section 802.01B of the NYSE’s Listed Company Manual because we had fallen below the NYSE’s continued listing standard requiring listed companies to maintain an average global market capitalization over a consecutive 30 trading day period of at least $15,000,000. On November 9, 2022, the Common Stock and public warrants began trading on over-the-counter (“OTC”) market under the symbols QNGY and QNGYW, respectively. We intend to appeal the NYSE’s determination to delist our Common Stock and public warrants, but unless our global market capitalization increases to at least $15,000,000 prior to the time the delisting becomes effective, we do not believe such appeal will ultimately be successful, in which case our Common Stock and public warrants will be delisted after the completion of the NYSE’s application to the Securities and Exchange Commission. Should our securities be delisted, we can provide no assurance that we will apply to, or be able to, re-list our Common Stock or the public warrants on a national securities exchange or that there will be an active market for these securities on the OTC. Moreover, without an active trading market, the market price of our securities may be extremely volatile and not reflective of the market price that would be seen on a more active trading market. For so long as our Common Stock is suspended from trading on the NYSE, which suspension will become permanent if our Common Stock is ultimately delisted from the NYSE, we and our stockholders could face significant negative consequences including:(i) limited availability of market quotations for our securities, (ii) a reduction in the number of investors willing to hold or acquire our Common Stock, which would negatively impact our ability to access equity markets and obtain financing, (iii) a determination that the Common Stock is a “penny stock” which would require brokers trading in the Common Stock to adhere to more stringent rules, possibly resulting in a reduced level of trading activity in the secondary trading market for shares of Common Stock, (iv) a limited amount of analyst coverage, (v) a decreased ability to issue additional securities or obtain additional financing in the future, and (vi) an impairment of our ability to provide equity incentives to our employees.

We do not intend to pay cash dividends for the foreseeable future.

We currently intend to retain our future earnings, if any, to finance the further development and expansion of our business and do not intend to pay cash dividends in the foreseeable future. Any future determination to pay dividends will be at the discretion of our board

of directors and will depend on our financial condition, results of operations, capital requirements, restrictions contained in future agreements and financing instruments, business prospects and such other factors as our board of directors deems relevant.

We may be subject to securities litigation, which is expensive and could divert management attention.

The market price of our Common Stock has been volatile and may continue to be volatile in the future and, in the past, companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert management’s attention from other business concerns, which could seriously harm our business.

A small number of stockholders will continue to have substantial control over us, which may limit other stockholders’ ability to influence corporate matters and delay or prevent a third party from acquiring control over us.*

Our directors and executive officers and beneficial owners of 5% or more of our voting securities and their respective affiliates, beneficially owned, in the aggregate, approximately 61% of our outstanding common stock as of August 5, 2022. This significant concentration of ownership may have a negative impact on the trading price for our common stock because investors often perceive disadvantages in owning stock in companies with controlling stockholders. In addition, these stockholders will be able to exercise influence over all matters requiring stockholder approval, including the election of directors and approval of corporate transactions, such as a merger or other sale of our company or our assets. This concentration of ownership could limit stockholders’ ability to influence corporate matters and may have the effect of delaying or preventing a change in control, including a merger, consolidation or other business combination, or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control, even if that change in control would benefit the other stockholders.

Future resales of our Common Stock may cause the market price of our securities to drop significantly, even if our business is doing well.*

The Sponsor is subject to certain restrictions on transfer pursuant to that certain letter agreement, dated as of February 10, 2020, by and among the CCAC, the Sponsor, and the other parties signatory thereto with respect to: (i) the Founder Shares (as defined in such letter agreement); and (ii) private placement warrants (as defined in such letter agreement). Such restrictions on the Founder Shares end on the date that is one year after Closing, or are subject to an early price-based release if the price of the shares equals or exceeds $240.00 per share for any twenty trading days within any thirty-day trading period at least 150 days after the Business Combination.

However, following the expiration of such lockup, the Sponsor will not be restricted from selling shares of our Common Stock held by it, other than by applicable securities laws. Additionally, the PIPE Investors are not restricted from selling any of their shares of our Common Stock, other than by applicable securities laws. As such, sales of a substantial number of shares of Common Stock in the public market could occur at any time. To the extent our warrants are exercised, additional shares of our Common Stock will be issued, which will result in dilution to the holders of our Common Stock and increase the number of shares eligible for resale in the public market. These sales, or the perception in the market that the holders of a large number of shares intend to sell shares, could reduce the market price of Common Stock. We are unable to predict the effect that sales may have on the prevailing market price of our Common Stock and public warrants.

As restrictions on resale end and registration statements are available for use, the sale or possibility of sale of these shares could have the effect of increasing the volatility in our share price or the market price of our Common Stock could decline if the holders of currently restricted shares sell them or are perceived by the market as intending to sell them.

We may issue additional shares of Common Stock, including under the GEM Warrant, the 2023 Notes Warrants, the Unit Warrants, the Underwriter's Warrants, the Company's 2022 Equity Incentive Plan and the Company's 2022 Employee Stock Purchase Plan. Any such issuances would dilute the interest of our shareholders and likely present other risks.*

We may issue a substantial number of shares of Common Stock, including potentially under the GEM Agreement (if shares of our Common Stock resume trading on the NYSE or another U.S. national securities exchange, or other stock exchange, but not including the over-the-counter market), the warrant to purchase Common Stock of the Company exercisable for up to 2.5% of the outstanding Common Stock of the Company on a fully diluted basis as of the Closing for a period of three years (the “GEM Warrant”), the 2023 Notes Warrants, the Unit Warrants, the Underwriter’s Warrants, the Company's 2022 Equity Incentive Plan and the Company's 2022 Employee Stock Purchase Plan, or preferred stock.

Any such issuances of additional shares of Common Stock or preferred stock:

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may significantly dilute the equity interests of our investors;

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may subordinate the rights of holders of Common Stock if preferred stock is issued with rights senior to those afforded our Common Stock;

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could cause a change in control if a substantial number of shares of our Common Stock are issued, which may affect, among other things, our ability to use our net operating loss carry forwards, if any, and could result in the resignation or removal of our present officers and directors; and

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may adversely affect prevailing market prices for our Common Stock and/or warrants.

There is no guarantee that the warrants will be in the money at the time they become exercisable, and they may expire worthless.

The exercise price for our warrants is $230.00 per share of Common Stock. There is no guarantee that the warrants will be in the money following the time they become exercisable and prior to their expiration, and as such, the warrants may expire worthless.

We may amend the terms of the warrants in a manner that may be adverse to holders with the approval of the holders of at least a majority of then outstanding public warrants. As a result, the exercise price of your warrants could be increased, the exercise period could be shortened and the number shares of Common Stock purchasable upon exercise of a warrant could be decreased, all without your approval.

Our warrants were issued in registered form under the warrant agreement between Continental Stock Transfer & Trust Company, as warrant agent, and us. The warrant agreement provides that the terms of the warrants may be amended without the consent of any holder for the purpose of curing any ambiguity or curing, correcting or supplementing any defective provision or adding or changing any other provisions with respect to matters or questions arising under the warrant agreement, but requires the approval by the holders of at least a majority of then outstanding public warrants to make any change that adversely affects the interests of the registered holders. Accordingly, we may amend the terms of the public warrants in a manner adverse to a holder if holders of at least a majority of then outstanding public warrants approve of such amendment. Examples of such amendments could be amendments to, among other things, increase the exercise price of the warrants, shorten the exercise period or decrease the number of shares of Common Stock purchasable upon exercise of a warrant.

The Unit Warrants will not be listed on any securities exchange and as such there will not be a public market for such securities.*

There is no established public trading market for the Unit Warrants, and we do not expect a market to develop. In addition, we do not intend to apply for listing of the Unit Warrants on any securities exchange or trading system. Without an active market, the liquidity of the Unit Warrants will be limited, and investors may be unable to liquidate their investments in the Unit Warrants.

The Unit Warrants may not have any value and do not entitle the holder to any rights as common stockholders until the holder exercises the Unit Warrant for shares of our Common Stock.*

The Unit Warrants will be exercisable for five years from the date of issuance at an initial exercise price per share of $1.70. In the event that the price of a share of our Common Stock does not exceed the exercise price of the Unit Warrants during the period when the Unit Warrants are exercisable, the Unit Warrants may not have any value. Further, until a Unit Warrant holder acquires shares of our Common Stock upon exercise of its Unit Warrants, the Unit Warrants will not provide such holder any rights as a common stockholder. Upon the exercise of Unit Warrants, a Unit Warrant holder will be entitled to exercise the rights of a common stockholder only as to matters for which the record date occurs on or after the exercise date.

Delaware law and our Organizational Documents contain certain provisions, including anti-takeover provisions that limit the ability of stockholders to take certain actions and could delay or discourage takeover attempts that stockholders may consider favorable.

Our certificate of incorporation, as amended (the “Charter”) and bylaws (the “Bylaws,” and together with the Charter, the “Organizational Documents”), and the General Corporation Law of the State of Delaware, as amended (the “DGCL”), contain provisions that could have the effect of rendering more difficult, delaying, or preventing an acquisition that stockholders may consider favorable, including transactions in which stockholders might otherwise receive a premium for their shares. These provisions could also limit the price that investors might be willing to pay in the future for shares of our Common Stock, and therefore depress the trading price of our Common Stock. These provisions could also make it difficult for stockholders to take certain actions, including electing directors who are not nominated by the current members of our board of directors or taking other corporate actions, including effecting changes in our management. Among other things, the Organizational Documents include provisions regarding:

•

providing for a classified board of directors with staggered, three-year terms which could delay the ability of stockholders to change the membership of a majority of our board of directors;

•

the ability of our board of directors to issue shares of preferred stock, including “blank check” preferred stock and to determine the price and other terms of those shares, including preferences and voting rights, without stockholder approval, which could be used to significantly dilute the ownership of a hostile acquirer;

•

our Charter prohibits cumulative voting in the election of directors, which limits the ability of minority stockholders to elect director candidates;

•

the limitation of the liability of, and the indemnification of, our directors and officers;

•

the right of our board of directors to elect a director to fill a vacancy created by the expansion of our board of directors or the resignation, death or removal of a director, which prevents stockholders from being able to fill vacancies on our board of directors;

•

the ability of our board of directors to amend the Bylaws, which may allow our board of directors to take additional actions to prevent an unsolicited takeover and inhibit the ability of an acquirer to amend the Bylaws to facilitate an unsolicited takeover attempt; and

•

advance notice procedures with which stockholders must comply to nominate candidates to our board of directors or to propose matters to be acted upon at a stockholders’ meeting, which could preclude stockholders from bringing matters before annual or special meetings of stockholders and delay changes in our board of directors and also may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of the Company.

These provisions, alone or together, could delay hostile takeovers and changes in control of us or changes in our board of directors and our management.

As a Delaware corporation, we are also subject to provisions of Delaware law, including Section 203 of the DGCL, which prevents some stockholders holding more than 15% of our outstanding Common Stock from engaging in certain Business Combinations without approval of the holders of substantially all of the Common Stock. Any provision of the Charter, Bylaws or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of Common Stock and could also affect the price that some investors are willing to pay for Common Stock.

The provisions of our Charter requiring exclusive forum in the Court of Chancery of the State of Delaware and the federal district courts of the United States for certain types of lawsuits may have the effect of discouraging lawsuits against our directors and officers.

Our Charter provides that, to the fullest extent permitted by law, and unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware (or, in the event that the Chancery Court does not have jurisdiction, the federal district court for the District of Delaware or other state courts of the State of Delaware) will be the sole and exclusive forum for (i) any derivative action, suit or proceeding brought on our behalf, (ii) any action, suit or proceeding asserting a claim of breach of a fiduciary duty owed by any our directors, officers or stockholders to us or our stockholders, (iii) any action, suit or proceeding arising pursuant to any provision of the DGCL or our Bylaws or our Charter (as each may be amended from time to time), (iv) any action, suit or proceeding as to which the DGCL confers jurisdiction on the Court of Chancery of the State of Delaware, or (v) any action, suit or proceeding asserting a claim against us or any current or former director, officer or stockholder governed by the internal affairs doctrine.

Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all suits brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder. Accordingly, both state and federal courts have jurisdiction to entertain such Securities Act claims. To prevent having to litigate claims in multiple jurisdictions and the threat of inconsistent or contrary rulings by different courts, among other considerations, the Charter also provides that, unless we consents in writing to the selection of an alternative forum, to the fullest extent permitted by law, the federal district courts of the United States of America shall be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act; however, there is uncertainty as to whether a court would enforce such provision, and investors cannot waive compliance with federal securities laws and the rules and regulations thereunder.

These provisions may have the effect of discouraging lawsuits against our directors and officers. The enforceability of similar choice of forum provisions in other companies’ certificates of incorporation has been challenged in legal proceedings, and it is possible that, in connection with any applicable action brought against us, a court could find the choice of forum provisions contained in our Charter to be inapplicable or unenforceable in such action.

If securities or industry analysts do not publish or cease publishing research or reports about us, our business, or our market, or if they change their recommendations regarding our Common Stock adversely, the price and trading volume of our Common Stock could decline.

The trading market for our Common Stock will be influenced by the research and reports that industry or securities analysts may publish about us, our business, our market, or our competitors. If any of the analysts who may cover us change their recommendation

regarding our stock adversely, or provide more favorable relative recommendations about our competitors, the price of our Common Stock would likely decline. If any analyst who may cover us were to cease their coverage or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our stock price or trading volume to decline.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

The following exhibits are filed as part of, or incorporated by reference into, this Quarterly Report on Form 10-Q.


		Incorporated by Reference
Exhibit No.	Description	Schedule/Form	File No.	Exhibit	Filing Date
3.1	Certificate of Incorporation of Quanergy Systems, Inc.	8-K	001-39222	3.1	February 14, 2022

3.2	Certificate of Amendment of Certificate of Incorporation of Quanergy System, Inc.	8-K	001-39222	3.1	October 6, 2022

3.3	Bylaws of Quanergy Systems, Inc.	8-K	001-39222	3.2	February 14, 2022

4.1	Form of Warrant to Purchase Shares of Common Stock	8-K	001-39222	4.1	November 2, 2022

4.2	Form of Representative’s Warrant to Purchase Shares of Common Stock	S-1/A	333-267420	4.8	October 13, 2022

4.3	Warrant Agency Agreement dated as of November 2, 2022, by and between Quanergy Systems, Inc. and Continental Stock Transfer & Trust Company	8-K	001-39222	4.3	November 2, 2022

10.1*	Sublease Extension Agreement by and between Infortrend Corporation and Quanergy Systems, Inc. dated July 28, 2022.

31.1*	Certification of the Principal Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*	Certification of the Principal Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1**	Certifications of the Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS	Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document)

101.SCH	Inline XBRL Taxonomy Extension Schema Document

101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB	Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase Document

104	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

† Certain exhibits and schedules to this Exhibit have been omitted in accordance with Regulation S-K Item 601(a)(5). The Registrant hereby agrees to furnish a copy of any omitted exhibits and schedules to the SEC upon its request.

+ Indicates a management contract or compensatory plan.

* Filed herewith.

** The certifications attached as Exhibit 32.1 that accompany this Quarterly Report on Form 10-Q are deemed furnished and not filed with the SEC and are not to be incorporated by reference into any filing of the Company under the Securities Act or the Exchange Act, whether made before or after the date of this Quarterly Report on Form 10-Q, irrespective of any general incorporation language contained in such filing.

SIGNATURES

Pursuant to the requirements of Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



	QUANERGY SYSTEMS, INC.

Date: November 14, 2022	By:	/s/ Kevin J. Kennedy
		Name:	Kevin J. Kennedy
		Title:	Chief Executive Officer
			(Principal Executive Officer)

Date: November 14, 2022	By:	/s/ Patrick Archambault
		Name:	Patrick Archambault
		Title:	Chief Financial Officer
			(Principal Financial Officer and
			Principal Accounting Officer)

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