Microvast Holdings, Inc. — Q1 2023 Form 10-Q Summary
Business Context and Reporting Period
Microvast develops, manufactures and sells lithium-ion battery components and systems for electric commercial vehicles and utility-scale energy storage. The unaudited report covers the three months ended March 31, 2023, compared with the three months ended March 31, 2022. The Company operates primarily across the United States, China, Europe and other Asia-Pacific markets.
Financial Results and Liquidity
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $47.0 million | $36.7 million | Up 28.1% |
| Gross profit | $4.9 million | $0.01 million | Improved |
| Gross margin | 10.3% | Approximately 0.0% | Improved |
| Operating loss | $31.3 million | $43.3 million | Improved 27.6% |
| Net loss attributable to shareholders | $29.6 million | $43.8 million | Improved 32.4% |
| Basic and diluted loss per share | $0.10 | $0.15 | Improved |
| Net cash used in operating activities | $11.2 million | $24.9 million | Lower use of cash |
| Capital expenditures | $35.9 million | $41.1 million | Lower |
Revenue increased primarily because sales volume rose from approximately 113.9 MWh to 132.6 MWh. Revenue from China increased to $32.6 million, Europe increased to $10.2 million, and other Asia-Pacific revenue declined to $3.1 million. The United States contributed $1.0 million.
At March 31, 2023, cash and cash equivalents were $200.3 million, restricted cash was $60.2 million, and short-term investments were $25.3 million, for total reported liquidity of approximately $285.8 million. Total assets were $1.004 billion and total liabilities were $398.2 million.
Total bank borrowings were $51.0 million, including $21.8 million classified as current. Long-term bonds payable were $43.9 million and are scheduled to mature in 2027 under the amended repayment schedule. Management stated that the Company was in compliance with material debt covenants. Cash held by foreign subsidiaries included approximately $26.5 million in China, $5.3 million in Germany and $0.6 million in the United Kingdom, and may not be immediately available to fund U.S. operations without repatriation and potential withholding taxes.
Material Changes Versus the Prior Comparable Period
- Gross margin improved to 10.3% from approximately 0.0%, which management attributed primarily to better economies of scale from higher sales volume.
- Operating expenses declined 16.5% to $36.2 million, mainly because of lower share-based compensation. General and administrative expense declined 21.9%, research and development expense declined 4.0%, and selling and marketing expense declined 16.8%.
- Net loss narrowed by $14.2 million to $29.6 million, but the Company remained substantially loss-making.
- Operating cash use improved to $11.2 million, while investing cash use remained significant at $35.8 million, primarily for manufacturing capacity and property, plant and equipment.
- Property, plant and equipment increased to $443.1 million from $335.1 million at December 31, 2022. Accrued expenses and other current liabilities increased to $93.1 million from $66.7 million, primarily reflecting higher property and equipment payables.
- Manufacturing capacity expansion continued in Huzhou, China and Clarksville, Tennessee. The Huzhou 2 GWh expansion began trial production in the first quarter, while the Clarksville 2 GWh expansion was expected to be completed in the fourth quarter of 2023.
- The Company invested $5.1 million for a 70% interest in Microvast Precision Works; the noncontrolling-interest holder contributed patents valued at $2.2 million.
Guidance, Outlook, Risks and Unusual Items
- Management reported an order backlog of approximately $486.7 million, equivalent to approximately 2,086.6 MWh, with more than 90% attributable to the United States and Europe. The Company expected to fulfill most of the backlog during 2023 and 2024.
- The Huzhou and Clarksville expansions are expected to add 4 GWh of capacity. Estimated total capital expenditures for these expansions are $460 million to $490 million, compared with $274.7 million already spent from Business Combination proceeds on manufacturing and related facilities.
- The Company stated that existing liquidity, operating cash flows and financing sources were expected to fund operations and planned activities for at least the next 12 months. It also had approximately $67.8 million available under a Huzhou project finance facility and $9.5 million available under a working-capital credit line.
- Microvast was selected with General Motors for a potential $200 million Department of Energy grant to support a Kentucky separator manufacturing facility. The grant remained subject to negotiated terms and conditions, and the project requires additional financing that may not be available on acceptable terms.
- Unfunded or future commitments included $173.9 million of capital commitments, $47.1 million of purchase commitments primarily for inventory, and future operating lease payments of $23.8 million before imputed interest.
- Key risks include continued losses, substantial capital requirements, possible need for additional financing, execution and cost risks for capacity expansions, raw-material price and supply volatility, customer order cancellations, competition, operations in China, foreign-exchange exposure, regulatory changes, product liability, supply-chain disruption and reduced government incentives.
- Share-based compensation was $18.1 million in Q1 2023, a significant noncash expense. The Company also recorded a $17,000 gain from the change in fair value of its private warrant liability.
- Management reported that disclosure controls and procedures were effective as of March 31, 2023 and that there were no material changes in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Whether the reported $486.7 million backlog converts into revenue on the expected 2023–2024 schedule and at targeted margins.
- Actual completion dates, total costs and production yields for the Huzhou and Clarksville expansions.
- Availability and terms of additional financing needed for the planned capacity program and the Kentucky separator project.
- Final terms, conditions and funding status of the potential $200 million DOE grant.
- Whether gross-margin improvement is sustainable after accounting for raw-material costs, warranty expenses, pricing and product mix.
- The pace of cash consumption, including capital commitments, working-capital needs and debt maturities.
- Potential restrictions on foreign subsidiary cash, currency movements and the effect of a reported 10% adverse Renminbi exchange-rate change, which management estimated could produce a $2.0 million foreign-currency loss.