Business Context and Reporting Period
Microvast Holdings, Inc. develops and manufactures lithium-ion battery systems and components for electric vehicles and energy storage, with operations primarily in Asia-Pacific and expanding activity in Europe and the United States. This unaudited Form 10-Q covers the three and nine months ended September 30, 2022, compared with the corresponding 2021 periods.
Reported backlog for battery systems was approximately $140.6 million, or 477.4 MWh, at September 30, 2022, versus $52.7 million, or 214.6 MWh, at September 30, 2021.
Key Financial Metrics
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Revenue | $38.6 million | $36.9 million | $139.7 million | $85.2 million |
| Gross profit/(loss) | $2.0 million | ($35.9 million) | $6.8 million | ($43.9 million) |
| Gross margin | 5.2% | (97.3%) | 4.9% | (51.5%) |
| Operating loss | ($37.1 million) | ($113.3 million) | ($125.3 million) | ($146.5 million) |
| Net loss | ($36.5 million) | ($116.5 million) | ($124.5 million) | ($159.8 million) |
| Net loss per share | ($0.12) | ($0.49) | ($0.41) | ($1.27) |
- Revenue increased 4.7% year over year in Q3 and 64.0% in the first nine months. Nine-month sales volume increased to approximately 478.7 MWh from 257.8 MWh.
- Cash flow from operations was negative $58.6 million for the first nine months, compared with negative $24.7 million in 2021. Investing cash flow was negative $84.7 million, primarily due to manufacturing and property, plant and equipment expansion.
- Financing activities generated $34.2 million, consisting primarily of $58.7 million of borrowings, partly offset by $24.5 million of repayments.
- Cash, cash equivalents and restricted cash totaled $415.7 million at September 30, 2022, including $295.8 million of unrestricted cash and $119.9 million of restricted cash.
- Total assets were $972.9 million and shareholders’ equity was $615.9 million at September 30, 2022. Accumulated deficit was $757.5 million.
- Bank borrowings totaled $45.0 million, while convertible bonds totaled $73.1 million. The company also had $69.3 million available for drawdown under its Huzhou project finance facility.
- Capital commitments for construction and equipment were $260.5 million at September 30, 2022.
Material Changes Versus the Prior Comparable Period
- Q3 gross profit improved by $37.9 million, and the gross margin moved from a 97.3% loss to a 5.2% profit margin. Management attributed the improvement primarily to the absence of a $34.1 million legacy-product warranty accrual recorded in Q3 2021, increased scale, and higher sales volume. Material cost inflation partially offset the improvement.
- Nine-month gross profit improved by $50.7 million, benefiting from the absence of approximately $40.8 million of legacy-product warranty accruals recorded in the prior-year period.
- Nine-month operating expenses increased 26.7% to $133.4 million, including higher general and administrative, research and development, and selling and marketing expenses. Share-based compensation was $78.2 million for the period.
- General and administrative expense decreased in Q3 primarily because of lower share-based compensation and foreign-exchange losses, but increased for the nine-month period due to higher share-based compensation, professional fees, and business expansion costs.
- Cash and cash equivalents declined from $480.9 million at December 31, 2021 to $295.8 million at September 30, 2022, while restricted cash increased from $55.2 million to $119.9 million.
- Inventory increased from $53.4 million at year-end 2021 to $82.3 million at September 30, 2022, reflecting expanded production activity and working-capital requirements.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management stated that existing liquidity, operating cash flows, and financing sources are expected to fund operations and commitments for at least the next 12 months. The filing does not provide formal revenue or earnings guidance.
- The company expects to spend an additional $90 million to $120 million on capacity expansion during the remainder of 2022. Total planned spending for Huzhou, China and Clarksville, Tennessee expansions is estimated at $460 million to $490 million, supporting approximately 4 GWh of additional capacity.
- Convertible bond repayment terms were amended in September 2022. Approximately $14.6 million was due on or before November 10, 2022, another $14.6 million on or before December 31, 2022, and the remaining $43.9 million on or before January 31, 2027. A 12% interest rate may apply upon default.
- In October 2022, the Department of Energy selected Microvast, in collaboration with General Motors, to negotiate approximately $200 million of grant funding for a U.S. polyaramid separator facility. The grant remained subject to negotiated terms, conditions precedent, and finalization as of the filing.
- Key operating risks include COVID-19 restrictions and supply-chain disruptions in China, raw-material price volatility, customer order changes or cancellations, inflation and rising interest rates, foreign-exchange exposure, intense competition, regulatory and trade restrictions, cybersecurity, product liability, and the need for additional capital to execute expansion plans.
- The company reported a unanimous jury verdict in its favor in the Matthew Smith litigation, with all claims dismissed with prejudice and no related contingency accrual recorded.
- Management concluded that disclosure controls and procedures were effective as of September 30, 2022, with no material changes in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Whether the improved gross margin is sustainable after excluding the prior-year legacy warranty accrual benefit and considering raw-material inflation.
- The timing and funding of the November and December 2022 convertible bond repayments and the company’s compliance with all debt covenants.
- Whether backlog converts into revenue on schedule and whether customers maintain or modify their orders.
- The final terms, conditions, and timing of the proposed $200 million DOE grant.
- Actual spending, completion timing, and production ramp for the Huzhou and Clarksville capacity expansions.
- The pace of cash consumption, inventory growth, and potential need for additional equity or debt financing.
- Exposure to China lockdowns, transportation constraints, foreign-exchange movements, customer concentration, and warranty claims.