QUANERGY SYSTEMS, INC. MANAGEMENT REPORT AND ANALYSIS OF FINANCIAL POSITION AND OPERATING RESULTS (Form 10-Q)

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 five 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 Mapping market, where customers are currently utilizing the M8 mechanical
LiDAR for terrestrial and aerial mapping; 4) the Industrial market, where we are
launching our solid state and mechanical LiDAR solutions for material handling,
logistics, and measurement; and 5) 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 S Series LiDAR 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 March 31, 2022, we have raised, in the aggregate, net
proceeds of approximately $286 million, including approximately $153 million
from the issuance of convertible preferred stock, approximately $89 million from
the issuance of convertible notes and approximately $44 million of net proceeds
from the Business Combination. In the year ended December 31, 2021 and three
months ended March 31, 2022, we incurred a net loss of $63.5 million and $104.7
million, respectively, and used $30.1 million and $22.7 million, respectively,
in cash to fund our operations. We have an accumulated deficit of $412.3 million
since our formation.

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). Each of
these annual results are quite a bit higher than the four new solutions we
released in 2019. During the three months ended March 31, 2022, we released
three new solutions (two sensors and one software product). 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. As we continue to fine tune a new silicon detector, we expect to
improve our sensor performance and increase our technical relevance for
transportation and industrial applications.

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Impact of COVID-19


The extensive impact of the pandemic caused by the novel coronavirus
("COVID-19") has resulted, and will likely continue to result, in significant
disruptions to the global economy, as well as businesses and capital markets
around the world. In an effort to halt the outbreak of COVID-19, a number of
countries, states, counties, and other jurisdictions have imposed, and may
impose in the future, various measures, including but not limited to, voluntary
and mandatory quarantines, stay-at-home orders, travel restrictions, limitations
on gatherings of people, reduced operations, and extended closures of
businesses.

With respect to our results, sales for the three months ended March 31, 2022 and
for the full years of 2021 and 2020 were heavily impacted by COVID-19 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 furloughing nearly 50% of our employees, negotiating extended payment
terms with vendors, cutting wages across the entire workforce and reducing
overall external contractor spending. We also benefited from a $2.5 million
Paycheck Protection Program ("PPP") loan from the Small Business Administration.
We maintained a cautious pace of spending through the year ended December 31,
2021, which when combined with the issuance of $48.7 million in convertible
notes, gave us adequate liquidity to run our operating plan. The pace of
spending on core operating activities remained judicious during the three months
ended March 31, 2022, however, the quarter was also impacted by large
transaction related expenses such as elevated legal and accounting fees and
public company insurance costs.

While business conditions improved significantly year over year, over the last
four quarters including, the three months ended March 31, 2022, broader
implications of the COVID-19 pandemic were present throughout the year on our
workforce, operations, supply chain, and customer demand. For the remainder of
2022, we envision significant uncertainties remaining relating to disruptions
from COVID-19, broad based supply chain shortages, and geopolitical risks
related to the events in the 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 combinations 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., 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 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 of ("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.

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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 3,695,000 common shares of our common stock (the “PIPE Shares”), for a purchase price of $10.00 per share and an aggregate purchase price of $36,950,000, under separate subscription agreements. The sale of the PIPE Shares was completed substantially at the same time as 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.

Following the Merger, we became the successor of a SECOND
company registered and listed under the symbol “QNGY” with New York Stock Exchangewhich will require us to hire additional staff and implement procedures and processes to meet regulatory requirements and customary public company practices.

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 are 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 keep cost downs ahead of price downs 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 TAM 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.

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End of market concentration


Until now, the majority of our revenue has come from flow management
applications which made up 69% of our revenue for the three months ended
March 31, 2022, 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.

Continuous 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 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 see 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 as auto 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.

While increasing adoption of LiDAR technology may drive 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 strengthen our positioning with strong investments in new products to increase market acceptance of our LiDAR technology.

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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 liabilities.

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 months ended March 31, 2022and 2021, respectively:

                                                  Three months ended
                                                       March 31,
                                                  2022           2021

                                                   ($ in thousands)
Adjusted EBITDA
Net loss                                       $ (104,682 )    $ (14,714 )
Stock-based compensation expense                   51,561          1,581
Depreciation and amortization                         228            251
Interest expense                                   40,046          3,685
Interest income                                        (2 )           (1 )
Change in fair value of derivative liability        2,337          2,317
Income tax provision                                    3              4

Adjusted EBITDA                                $  (10,509 )    $  (6,877 )




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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.

presentation basis


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 operating results

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


We recognize revenue from sales of products and services upon delivery. Delivery
occurs upon transfer of title and all risks and rewards of ownership to the
customer, which is generally upon shipment. 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.

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Functionnary costs


Operating expenses consist of sales and marketing, research and development
expenses 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 in research and development has grown from 58
as of December 31, 2021 to 60 as of March 31, 2022. Our full-time employee
headcount in general and administrative functions has decreased from 12 as of
December 31, 2021 to 11 as of March 31, 2022. Our full-time employee headcount
in sales and marketing functions has grown from 23 as of December 31, 2021 to 26
as of March 31, 2022. We expect to continue to hire new employees for the
departments discussed above to support our growth. The timing of these
additional hires could materially affect our operating expenses in any
particular period.

We expect to continue to invest substantial resources to support our growth and expect each of the following operating expense categories to increase in absolute dollars for the foreseeable future.

Research and development costs


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


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.

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Other income (expenses), net


Other income/(expense) consists mainly of interest income, interest expense and
other expenses. Interest expense relates to interest on issuance of convertible
notes and amortization of debt issuance costs. We receive interest income from
our cash equivalents and investments in marketable securities. Other expense
includes periodic adjustments to derivative liability at each balance sheet date
and expenses realized due to debt discount provided to convertible promissory
note holders.

Provision for income taxes

Our provision for income taxes 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.

Operating results

Comparisons for the three months ended March 31, 2022 and 2021


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

                                    Three months ended
                                         March 31,
                                    2022           2021         $ Change        % Change

                                     ($ in thousands)
Net sales                        $    1,367      $     383      $     984             257 %
Cost of goods sold
(1)                                   1,853            497          1,356             273 %

Gross profit (loss)                    (486 )         (114 )         (372 )          -326 %
Research and development
(1)                                  12,824          4,357          8,467             194 %
Sales and marketing
(1)                                   7,196          1,745          5,451             312 %
General and administrative
(1)                                  41,792          2,493         39,299            1576 %

Operating expenses                   61,812          8,595         53,217             619 %

Operating loss                      (62,298 )       (8,709 )      (53,589 )          -615 %
Other income (expense):
Interest income (expense), net      (40,044 )       (3,684 )      (36,360 )          -987 %
Other income (expense), net          (2,337 )       (2,317 )          (20 )            -1 %

Loss before income taxes           (104,679 )      (14,710 )      (89,969 )          -612 %
Provision for income taxes               (3 )           (4 )            1              25 %

Net loss                         $ (104,682 )    $ (14,714 )    $ (89,968 )          -611 %



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

    thousands:



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                               Three months ended
                                    March 31,
                                2022          2021
Cost of goods sold           $       683     $    20
Research and development           7,677         441
Sales and marketing                4,598         212
General and administrative        38,603         908

                             $    51,561     $ 1,581



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 March 31, 2022, $50.7 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 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 March 31,
                  2022                 2021       $ Change      % Change

                    ($ in thousands)
Net Sales   $           1,367         $   383     $     984           257 %

Net sales by geographic location:

                                            Three months ended March 31,
                                              2022                  2021           $ Change        % Change

                                                  ($ in thousands)
Americas                                $            276         $       171             105              61 %
Asia                                                 744                 149             595             399 %
Europe, Middle East and Africa                       347                  63             284             451 %

Total net sales                         $          1,367         $       383             984             257 %



Net sales increased by $1.0 million to $1.4 million for the three months ended
March 31, 2022, from $0.4 million for the three months ended March 31, 2021.
This increase is the result of increased customer orders along-side of general
economic activity and increasing levels of customer engagement, primarily
attributable to an increase in M series LiDAR Sensor revenue. Security and Smart
Spaces customers have been the largest drivers of this improvement. We also saw
some easing in the impact of COVID-19 on business conditions relative to the
three months ended March 31, 2021.

Cost of Goods Sold and Gross Margin

                       Three months ended March 31,
                         2022                 2021           $ Change        % Change

                             ($ in thousands)
Cost of goods sold   $       1,853         $       497      $    1,356             273 %
Gross margin                  (486 )              (114 )          (372 )          -326 %
Gross margin %                 -36 %               -30 %



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Cost of goods sold increased by $1.4 million to $1.9 million for the three
months ended March 31, 2022, from $0.5 million for three months ended March 31,
2021, while gross profit decreased by $0.4 million during the same period. The
increase in cost of goods sold and resultant decrease in gross margin was mainly
attributable to a $0.7 million increase in stock-based compensation, a $0.4
million increase in materials costs related to sales growth and a $0.3 million
increase in labor costs required to service future growth with hiring in
anticipation of increased demand.

Operating Expenses

                                            Three months ended March 31,
                                              2022                 2021           $ Change        % Change

                                                  ($ in thousands)
Research and development                 $        12,824       $       4,357      $   8,467             194 %
Sales and marketing                                7,196               1,745          5,451             312 %
General and administrative                        41,792               2,493         39,299           1,576 %

                                         $        61,812       $       8,595      $  53,217             619 %


Research and development costs


Research and development expenses increased by $8.5 million to $12.8 million for
the three months ended March 31, 2022, from $4.3 million for the three months
ended March 31, 2021. The increase was primarily attributable to a $7.2 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 $0.9 million increase in personnel and related fringe costs resulting
from increased headcount, a $0.2 million increase in services, a $0.1 million
increase in materials and tools supplies costs and other individually
insignificant items.

Sales and Marketing


Sales and marketing expense increased by $5.4 million to $7.1 million for the
three months ended March 31, 2022, from $1.7 million for the three months ended
March 31, 2021. The increase was primarily attributable to a $4.4 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 $0.4 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 $0.2 million increase in
commission costs on increased revenues.

General and administrative costs


General and administrative expense increased by $39.3 million to $41.8 million
for the three months ended March 31, 2022, from $2.5 million for the three
months ended March 31, 2021. The increase was primarily attributable to an
increase of $37.7 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 $1.1 million increase in insurance costs as a
result of the Business Combination, a $0.4 million increase in personnel and
related fringe costs and other individually insignificant items.

Interest expense, net and other income (expenses), net


                                            Three months ended March 31,
                                             2022                  2021            $ Change        % Change

                                                  ($ in thousands)
Interest expense, net                   $      (40,044 )       $      (3,684 )     $ (36,360 )           987 %
Other income (expense), net                     (2,337 )              (2,317 )           (20 )             1 %



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Interest expense, net increased $36.6 million to $40.0 million for the three
months ended March 31, 2022, compared to $3.7 million for the three months ended
March 31, 2021. The increase was primarily attributed to $36.7 million of
interest expense recognized on the conversion of the 2023 Notes to equity at
closing of the Business Combination.

Other expenses, net $2.3 million within three months March 31, 2022 and 2021. The net change in other income (expenses) is negligible.

Income Taxes

                               Three months ended March 31,
                                  2022                 2021         $ Change       % Change

                                     ($ in thousands)
Loss before income taxes     $      (104,679 )      $  (14,710 )    $ (89,969 )          612 %
Provision for income taxes                (3 )              (4 )            1             25 %


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 March 31, 2022, as compared to three months ended March 31, 2021, was
immaterial.

Cash and capital resources

Since Legacy Quanergy’s inception, it has funded its operations primarily through the sale 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 $412.3 million as of March 31, 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 3,527,241 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 6,298,306 common
stock warrants in February 2021. In connection with the Business Combination,
the principal amount and deferred interest on the 2023 Notes were converted into
14,464,992 shares of our Common Stock.

As of March 31, 2022, we had $21.2 million of cash and cash equivalents.
Further, we 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 gives 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, once the effectiveness of the resale S-1
Registration Statement and other requirements are completed, which is expected
to occur in the second quarter of FY 2022. 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 March 31, 2022, there were future
minimum lease payments of $0.3 million.

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


                                      Three months ended March 31,
                                       2022                  2021

                                            ($ In thousands)
Net cash provided by (used in)
Operating activities              $      (22,746 )       $      (6,618 )
Investing activities                        (202 )                  -
Financing activities                      18,029                48,735
Effect of exchange rate changes              (11 )                   5

                                  $       (4,930 )       $      42,122



Operating Activities

For the three months ended March 31, 2022, operating activities used
$22.7 million in cash. The primary factors affecting our operating cash flows
during this period were our net loss of $104.7 million, offset by
our non-cash charges of $94.9 million, primarily consisting of stock-based
compensation of $51.6 million, non-cash interest expense of $40.0 million,
change in fair value of derivative liabilities of $2.3 million, non-cash bonus
expense of $0.5 million, depreciation and amortization of $0.2 million and $0.2
million of non-cash lease expense. In the three months ended March 31, 2022, we
also paid out $9.3 million of interest in cash on the 2022 Notes. The net cash
used from changes in our operating assets and liabilities was $3.6 million. This
amount consists of $0.4 million of cash provided from changes in our operating
liabilities, primarily due to a $0.3 million increase in accounts payable and a
$0.1 million increase in other long term liabilities, offset by cash used from
changes in our operating assets and liabilities of $4.0 million which primarily
consists of a $3.2 million increase in prepaid expenses and other current
assets, a $0.3 million increase in accounts receivable, a $0.2 million decrease
in accrued expenses, a $0.2 million decrease in other current liabilities, and a
$0.1 million increase in inventory.

For the three months ended March 31, 2021, operating activities used
$6.6 million in cash. The primary factors affecting our operating cash flows
during this period were our net loss of $14.7 million, offset by
our non-cash charges of approximately $7.8 million primarily consisting of
stock-based compensation of $1.6 million, non-cash interest expense of
$3.7 million, change in fair value of derivative liabilities of $2.3 million,
and depreciation and amortization of $0.3 million. The net cash provided from
changes in our operating assets and liabilities was $0.3 million. This amount
consists of $1.7 million of cash provided from changes in our operating assets
and liabilities, primarily due to a $1.1 million increase in accounts payable,
$0.3 million decrease in accounts receivable and $0.2 million decrease in
prepaid expenses and $0.1 million decrease in inventory, offset by cash used
from changes in our operating assets and liabilities of $1.5 million which
primarily consists of a $0.8 million increase in other long-term assets, and a
$0.6 million decrease in accrued expenses.

Investing activities

Net cash used in investing activities for each of the three months ended
March 31, 2022 and 2021 was irrelevant.

Fundraising activities


During the three months ended March 31, 2022, cash provided by financing
activities was $18.0 million, primarily consisting of net proceeds from the
Business Combination and sale of the PIPE Shares of $50.4 million, offset by the
repayment of 2022 Notes of $25.8 million and payment of offering costs of $6.6
million.

During the three months ended March 31, 2021, cash provided by financing
activities was $48.7 million, consisting of net proceeds from the issuance of
convertible notes of $48.6 million and proceeds of $74 thousand from exercises
of stock options.

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Off-balance sheet arrangements

From March 31, 2022we have not entered into any off-balance sheet arrangements, as defined in the rules and regulations of the SECOND.

Significant 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 three months ended March 31, 20212,
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(g) – Recently Adopted Accounting Pronouncements” in our summary financial statements included elsewhere in this Quarterly Report on Form 10-Q.

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