Microvast Holdings, Inc. annual report, FY2022

Microvast Holdings, Inc. Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2022. The filing is an annual Form 10-K, not a standalone fourth-quarter report. Financial statements are presented under U.S. GAAP in U.S. dollars.

Business Context

Microvast designs and manufactures lithium-ion battery cells, components, modules, packs and systems primarily for electric commercial vehicles and utility-scale energy storage systems. Operations are concentrated in China, with expanding activities in the United States and Europe. The company reports one operating segment.

Revenue increased to $204.5 million, primarily from higher battery-cell sales and volume of approximately 694.2 MWh versus 489.2 MWh in 2021.
Order backlog at December 31, 2022 was approximately $410.5 million, or 1,599.7 MWh; nearly 90% related to the United States and Europe. Management expected to fulfill most of it during 2023 and 2024.
Microvast launched its Microvast Energy division in October 2022 to develop and sell utility-scale ESS containers.

Financial Metrics

Metric	2021	2022	Change
Revenue	$152.0 million	$204.5 million	+34.6%
Gross profit/(loss)	$(42.7) million	$9.1 million	+$51.8 million
Gross margin	(28.1%)	4.4%	Improved 32.5 percentage points
Operating loss	$(194.1) million	$(159.9) million	Improved $34.1 million
Net loss	$(206.5) million	$(158.2) million	Improved $48.3 million
Net loss per share	$(1.26)	$(0.52)	Improved
Net cash used in operating activities	$(45.0) million	$(53.9) million	Use increased $8.9 million
Net cash used in investing activities	$(87.9) million	$(175.9) million	Use increased $88.1 million
Net cash provided by financing activities	$624.9 million	$5.0 million	Prior period benefited from Business Combination financing

Operating expenses: $170.7 million, up 8.4%. R&D increased 26.5% to $43.5 million; general and administrative expense increased 2.9% to $104.6 million; selling and marketing expense increased 5.5% to $22.6 million.
Share-based compensation: $90.8 million was included in operating cash-flow adjustments; total share-based compensation recognized across expense and construction-in-progress categories was approximately $96.2 million.
Balance sheet: Total assets were $985.0 million and total liabilities were $372.0 million at year-end. Shareholders’ equity was $613.0 million.
Liquidity: Cash, cash equivalents, restricted cash and short-term investments totaled approximately $327.7 million. Cash and cash equivalents were $231.4 million, restricted cash was $71.2 million and short-term investments were $25.1 million.
Debt: Bank borrowings totaled $46.4 million, with rates generally ranging from 4.50% to 4.80% for bank loans. Convertible bonds totaled $43.9 million and were due in 2027, subject to amended repayment terms. The company reported compliance with material debt covenants.
Capital expenditures: $150.9 million in 2022. Management expected 2023 facility-expansion spending of $180 million to $210 million and total spending of approximately $460 million to $490 million for the Huzhou and Clarksville expansions.

Material Changes Versus 2021

Revenue growth reflected increased sales volume, but geographic mix became more concentrated in Asia-Pacific: 90% of 2022 revenue came from Asia-Pacific, including 65% from China, compared with 86% and 61%, respectively, in 2021. Europe declined to 8% of revenue from 13%, while the United States increased to 2% from 1%.
Gross margin turned positive primarily because the $46.5 million incremental warranty accrual for a defective legacy-product component recorded in 2021 did not recur. Higher raw-material prices and increased share-based compensation partially offset the improvement.
Operating loss and net loss improved, but the company remained significantly unprofitable. Management stated that losses are expected to continue at least until significant production of higher-energy cells, which was not expected before 2024 and could occur later.
Operating cash use increased and investing cash use more than doubled as manufacturing capacity and research facilities expanded.
Inventories increased to $84.3 million from $53.4 million, while accounts receivable increased to $119.3 million from $88.7 million.
The company adopted new lease and expected-credit-loss accounting standards in 2022. Adoption of the credit-loss standard reduced opening retained earnings by $0.9 million; lease adoption added operating lease assets and liabilities without a material income-statement effect.
Management reported that a material weakness in internal control over financial reporting identified in connection with the 2021 financial statements had been remediated as of December 31, 2022. Management concluded that disclosure controls and internal control over financial reporting were effective.

Guidance, Outlook, Risks and Unusual Items

Capacity expansion: Annual battery manufacturing capacity was approximately 3 GWh at year-end. Management targeted approximately 7 GWh by the end of 2023 and 11 GWh by 2025, including planned Huzhou and Clarksville expansions.
ESS contract: In December 2022, Microvast received a contract to supply a 1.2 GWh U.S. utility-scale ESS project, with initial deliveries expected in the third quarter of 2023.
DOE grant: The company was selected, in collaboration with General Motors, for up to $200 million of DOE grant funding for a U.S. polyaramid-separator facility. The grant remained subject to negotiation, conditions precedent and compliance requirements, and the project requires additional financing.
Government incentives: Management expects potential benefits from Inflation Reduction Act credits, including a potential $45 per kWh credit for qualifying U.S. cell and module production and potential customer investment-tax-credit benefits. Eligibility and implementation depend on future regulatory guidance.
Customer concentration: The top five customers represented 36.1% of 2022 revenue, and one customer represented 12%. Commercial-vehicle agreements generally do not require minimum purchases, increasing order-visibility risk.
Product and warranty risk: The company had $42.1 million of total product-warranty liability at year-end, including $29.0 million classified as non-current. Lithium-ion battery safety incidents, recalls, warranty claims and performance failures could materially affect results.
Supply-chain and margin risk: Raw-material prices, including lithium-related materials and other battery inputs, increased; 18% of raw-material purchases came from one supplier in 2022. The company does not currently hedge raw-material or foreign-currency exposure.
China and geopolitical risk: China accounted for 65% of revenue and most manufacturing capacity. Risks include PRC regulation, currency controls, restrictions on cash transfers, data and cybersecurity rules, U.S.-China tensions, COVID-19 disruptions and Russia-Ukraine-related sanctions and supply-chain effects.
Capital needs: The business is capital intensive and continues to generate operating losses and negative operating cash flow. Management believed existing liquidity would fund operations and planned expansion for at least the next 12 months, but disclosed that additional debt or equity financing may eventually be required.
Legal and contingencies: The company reported no pending legal proceedings expected to have a material adverse effect. It had approximately $227.4 million of capital commitments and $30.5 million of purchase commitments at December 31, 2022.
Dilution: Approximately 28.4 million warrants remained outstanding with an $11.50 exercise price, and substantial options, restricted awards and potential earn-out shares could dilute existing shareholders.

Most Important Facts to Verify

Whether the $410.5 million backlog converts into timely shipments and cash collections, particularly given customer concentration and non-binding or cancellable arrangements.
Whether Clarksville and Huzhou expansions achieve the stated production schedules, costs and capacity targets.
Whether the 1.2 GWh ESS project begins deliveries as planned and produces acceptable margins and warranty performance.
Final terms, funding conditions and eligibility requirements for the proposed $200 million DOE grant and Inflation Reduction Act credits.
Cash burn, capital-expenditure needs and the timing or terms of any future equity or debt financing.
Future warranty claims, inventory impairments and the sustainability of the 4.4% gross margin after the nonrecurrence of the 2021 legacy-product charge.
Exposure to China-related regulatory, currency, cash-repatriation, supply-chain and geopolitical risks.
Potential dilution from warrants, options, restricted stock awards, earn-out shares and other equity-linked instruments.