Microvast Holdings, Inc. — Q2 2022 Form 10-Q Summary
Business context and reporting period
Microvast develops, manufactures and sells 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 filing covers the three and six months ended June 30, 2022. The company completed its business combination with Tuscan Holdings Corp. on July 23, 2021; historical results are presented as a continuation of Microvast, Inc.
Financial performance and position
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $64.4 million | $33.4 million | $101.1 million | $48.3 million |
| Gross profit/(loss) | $4.8 million | $(6.8) million | $4.9 million | $(8.0) million |
| Gross margin | 7.5% | (20.3%) | 4.8% | (16.6%) |
| Operating loss | $(45.0) million | $(22.3) million | $(88.2) million | $(33.2) million |
| Net loss | $(44.2) million | $(27.1) million | $(88.0) million | $(43.4) million |
| Net loss per share | $(0.15) | $(0.40) | $(0.29) | $(0.68) |
| Cash flow from operations | Not separately provided | Not separately provided | $(63.5) million | $(15.0) million |
| Capital expenditures | Not separately provided | Not separately provided | $67.9 million | $29.9 million |
- Revenue increased 93.0% in Q2 and 109.2% for the first six months, driven primarily by higher sales volume. Sales volume increased to approximately 252.6 MWh in Q2 and 366.6 MWh for the first six months, compared with 104.7 MWh and 163.2 MWh, respectively, in the prior-year periods.
- Cash and cash equivalents were $333.9 million at June 30, 2022, compared with $480.9 million at December 31, 2021. Including restricted cash, total cash, cash equivalents and restricted cash was $396.9 million.
- Total assets were $971.6 million and total liabilities were $317.6 million at June 30, 2022. Shareholders’ equity was $654.0 million.
- Debt included $8.8 million of current bank borrowings and $73.1 million of convertible bonds. Convertible bonds were scheduled to mature with approximately $29.2 million due in 2023, $29.2 million in 2024 and $14.7 million in 2026. Management stated that the company was in compliance with material debt covenants.
- Backlog was approximately $105.3 million, or 299.5 MWh, at June 30, 2022, compared with $69.3 million, or 229.2 MWh, at June 30, 2021.
Material changes versus the prior comparable period
- Gross profitability improved substantially as scale increased, although operating and net losses widened because operating expenses grew faster than revenue.
- General and administrative expense increased 455.8% in Q2 and 462.1% year to date, principally because of $24.6 million and $42.7 million, respectively, of share-based compensation and higher professional-service costs.
- Research and development expense increased 73.8% in Q2 and 122.6% year to date, reflecting higher share-based compensation, personnel and development activity. Selling and marketing expense increased 56.8% in Q2 and 72.1% year to date.
- Share-based compensation totaled $30.5 million in Q2 and $58.8 million year to date. The former CFO’s awards were accelerated upon termination, resulting in $16.8 million of Q2 compensation expense.
- Operating cash burn increased to $63.5 million year to date, while investing cash use increased to $67.9 million, primarily for manufacturing and research facilities and equipment. Financing activities used $3.9 million, principally reflecting $17.3 million of bank-borrowing repayments partly offset by $13.5 million of new borrowings.
- The company recorded a $1.3 million Q2 and $0.8 million year-to-date gain from remeasurement of warrant liabilities. Prior-year periods included losses on convertible-note fair value changes that did not recur in 2022.
- Revenue mix shifted toward other Asia-Pacific markets: PRC revenue represented 53% of Q2 and six-month revenue in 2022, compared with 65% and 67%, respectively, in the prior-year periods. Europe and the U.S. together represented 9% of Q2 revenue and 9% of six-month revenue.
Guidance, outlook, risks and unusual items
- Management expects existing cash, cash equivalents, short-term investments and expected cash flows to fund operations and commitments for at least the next 12 months, while acknowledging that additional financing may be needed for future capital requirements.
- The company expected to spend an additional $180 million to $220 million during the remainder of 2022 on capacity expansion. Total capital expenditures for the Huzhou, China and Clarksville, Tennessee expansions were estimated at $450 million to $470 million, with projects expected to be completed in 2023 and to add approximately 4 GWh of capacity.
- COVID-19 restrictions and lockdowns in China disrupted suppliers, transportation through Shanghai and global supply chains. Other principal risks include raw-material prices and availability, inflation and interest rates, competition, customer order changes, regulatory and trade restrictions, cybersecurity, intellectual property, product liability and operations in China.
- Capital commitments for construction and property and equipment purchases were $261.8 million at June 30, 2022, primarily for lithium-battery production lines.
- A former-employee lawsuit seeks ownership of the equivalent of 416,780 post-business-combination shares and damages exceeding $1 million. The company did not accrue a loss because the outcome and potential loss could not reasonably be estimated; trial was expected in late summer 2022.
- The company adopted lease accounting and the expected-credit-loss standard in 2022. The credit-loss adoption reduced opening retained earnings by $0.9 million; lease adoption added approximately $17.1 million of operating lease right-of-use assets and $17.0 million of lease liabilities at June 30, 2022.
- Management stated that a previously identified material weakness involving insufficient U.S. GAAP and SEC-reporting expertise had been remediated as of June 30, 2022, although additional deficiencies could be identified in the future.
Important facts for investors to verify
- Whether backlog converts into revenue on expected timing and margins, particularly amid customer concentration, supply-chain disruption and delivery risks.
- Whether gross-margin improvement is sustainable after raw-material inflation, warranty costs and continued expansion spending.
- The pace and total cost of the Huzhou and Clarksville capacity expansions, including the remaining $261.8 million of capital commitments and planned 2022 spending.
- The sustainability of liquidity given $63.5 million of operating cash burn and $67.9 million of capital expenditures in the first six months.
- The effect of substantial share-based compensation, accelerated awards and potential dilution from options, warrants, earn-out shares and other equity awards.
- The outcome of the former-employee litigation and any other legal, regulatory or product-liability matters.
- Whether the remediated material weakness remains resolved and whether internal controls continue to support reliable SEC reporting.