Microvast Holdings, Inc. — Q1 2022 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three months ended March 31, 2022. Microvast develops and manufactures lithium-ion battery systems and components for electric vehicles and energy-storage applications, with operations primarily in China and Europe and expanding activity in the United States. The July 2021 business combination was accounted for as a reverse recapitalization; historical results generally represent Microvast, Inc. operations.
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Revenue | $36.7 million | $14.9 million | Up 145.5% |
| Gross profit/(loss) | $0.013 million | $(1.2) million | Improved $1.3 million |
| Gross margin | Approximately 0.0% | (8.3)% | Improved |
| Operating loss | $(43.3) million | $(10.8) million | Loss increased $32.4 million |
| Net loss | $(43.8) million | $(16.3) million | Loss increased $27.5 million |
| Net loss per share | $(0.15) | $(0.29) | Improved per share due principally to higher share count |
| Operating cash flow | $(24.9) million | $(2.2) million | Use increased $22.7 million |
| Capital expenditures | $41.1 million | $25.4 million | Use increased $15.6 million |
Financial position, liquidity and debt
- Cash and cash equivalents were $416.2 million at March 31, 2022, down from $480.9 million at December 31, 2021. Cash, cash equivalents and restricted cash totaled $470.7 million.
- Total assets were $998.7 million and shareholders’ equity was $657.4 million. The accumulated deficit was $676.7 million.
- Current liabilities were $181.4 million, including $13.3 million of short-term bank borrowings and $70.7 million of notes payable. Long-term bonds payable were $73.1 million.
- Bank borrowings carried interest rates of 3.80% to 6.00% and were current at quarter-end. Convertible bonds were due principally in 2023, 2024 and 2026, with stated interest rates ranging from 0% to 4%.
- Management stated that existing liquidity is expected to fund operating needs and planned commitments for at least the next 12 months. Approximately $20.1 million was held by PRC subsidiaries, with additional amounts in Germany and the United Kingdom, and may not be immediately available for U.S. operations without repatriation and potential withholding taxes.
Material changes versus the prior comparable period
- Revenue increased primarily from higher sales volume, approximately 113.9 MWh versus 58.5 MWh, higher average selling prices and product mix. Backlog increased to approximately $120.8 million, or 327.6 MWh, from $65.1 million, or 184.2 MWh.
- Revenue remained concentrated in China and Asia-Pacific, which represented 91% of Q1 2022 revenue. Europe represented 7% and the United States 2%.
- Cost of revenue increased 126.6%, but revenue grew faster, resulting in a small gross profit compared with a gross loss in Q1 2021. Higher material prices and $1.9 million of share-based compensation partially offset scale and pricing benefits.
- Operating expenses increased substantially: general and administrative expense rose to $26.1 million, R&D to $11.3 million and selling and marketing to $6.0 million. The increases included $26.2 million of share-based compensation across these functions.
- Net loss also reflected a $0.4 million loss from remeasurement of warrant liability. The prior-year period included a $3.6 million loss on convertible-note fair value changes and $1.9 million of subsidy income, compared with $0.1 million in Q1 2022.
- Cash declined by $65.4 million during the quarter, driven by $24.9 million of operating cash use and $41.1 million of capital expenditures. There was no significant financing cash flow in Q1 2022.
- The Company adopted lease accounting guidance and credit-loss guidance on January 1, 2022. The credit-loss adoption reduced opening retained earnings by $0.9 million; the lease adoption recorded approximately $18.4 million of operating lease right-of-use assets at March 31, 2022.
Guidance, outlook, commentary and risks
- Management expects to spend approximately $260 million to $310 million during the remainder of 2022 on capacity expansions. Planned expansions in Huzhou, China and Clarksville, Tennessee are expected to add approximately 4 GWh of capacity when completed, with total related capital expenditures estimated at approximately $446 million.
- Management expects the Huzhou and Clarksville projects to be completed in 2023, but stated that timing and costs may change. Capital commitments for construction and property, plant and equipment were $234.6 million at March 31, 2022.
- Management expects international sales to carry higher average selling prices and potentially higher gross margins than PRC sales, but current revenue remains heavily concentrated in China and Asia-Pacific.
- COVID-19 lockdowns in China disrupted suppliers, transportation and access to Shanghai-area logistics channels. The filing also identifies supply-chain constraints, inflation, raw-material pricing, customer cancellations, regulatory changes, competition, cybersecurity, geopolitical tensions and Russia-Ukraine-related sanctions or export controls as material risks.
- The Company remains loss-making and has not established a clear timetable for profitability. Management noted that additional equity or debt financing may be required for future capital needs, although it believes current resources are sufficient for disclosed plans.
- A former employee litigation matter seeks ownership of shares and damages exceeding $1,000; a trial was expected in mid-2022. The potential loss was not reasonably estimable and no accrual was recorded.
- Disclosure controls were not effective at March 31, 2022 because of a material weakness involving insufficient personnel with U.S. GAAP and SEC reporting expertise. Management is implementing hiring, training, policy and control-remediation measures but has not concluded that the weakness is fully remediated.
- The Company was identified by the SEC as a Commission-Identified Issuer because its PRC-based auditor was not subject to PCAOB inspection. The filing stated that, under then-current HFCAA requirements, the common stock and warrants could be delisted from Nasdaq in early 2024 unless the inspection issue, legislation or auditor status changed.
Important facts for investors to verify
- Whether revenue growth, backlog conversion and production volume continue without materially higher warranty, logistics or raw-material costs.
- Whether gross margin can remain positive and improve despite substantial operating expenses and share-based compensation.
- Actual spending, construction progress and completion timing for the Huzhou and Clarksville capacity expansions.
- Cash burn, restricted cash, subsidiary cash-transfer limitations and the adequacy of liquidity for expansion commitments.
- Status of the material weakness remediation and whether additional control deficiencies or financial-reporting corrections arise.
- Status of the PCAOB inspection and HFCAA delisting risk, including any auditor change or regulatory developments.
- Resolution and potential exposure from the former employee litigation and the adequacy of product-warranty reserves.