Microvast Holdings, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2023; filed April 1, 2024. Microvast develops and manufactures lithium-ion battery cells, components, modules, packs and systems for electric commercial vehicles and utility-scale energy storage systems (ESS). The company operates as one reporting segment, with principal operations in China, Europe and the United States.
Business context and reporting period
- Microvast completed a 2 GWh Huzhou, China expansion for its 53.5Ah NMC cell technology in the third quarter of 2023 and began full production.
- The Clarksville, Tennessee Phase 1A expansion remained incomplete because required financing was not secured. Management estimates approximately $150 million to $170 million of additional funding is needed to complete the project and related payables.
- The company purchased an ESS assembly facility in Windsor, Colorado, which it expected to begin delivering ESS containers in the second quarter of 2024.
- Year-end battery-system backlog was approximately $276.4 million, or 1,637.9 MWh, with approximately 84% attributable to Europe and the United States. Management expects most of the backlog to be fulfilled in 2024 and 2025.
Financial performance and condition
| Metric | 2023 | 2022 | Change |
|---|---|---|---|
| Revenue | $306.6 million | $204.5 million | +49.9% |
| Gross profit | $57.2 million | $9.1 million | +$48.2 million |
| Gross margin | 18.7% | 4.4% | +14.3 percentage points |
| Operating loss | $106.7 million | $159.9 million | Loss narrowed $53.2 million |
| Net loss | $106.4 million | $158.2 million | Loss narrowed $51.8 million |
| Net loss attributable to Microvast | $106.3 million | $158.2 million | Loss narrowed $51.9 million |
| Basic and diluted loss per share | $0.34 loss | $0.52 loss | Improved |
| Net cash used in operating activities | $75.3 million | $53.9 million | Use increased $21.4 million |
| Capital expenditures | $186.8 million | $150.9 million | +$35.9 million |
Revenue growth reflected higher battery-cell sales volume, which increased from approximately 694.2 MWh to 1,139.6 MWh. Geographic revenue shifted toward Europe: China represented 51% of 2023 revenue versus 65% in 2022, Europe represented 27% versus 8%, and the United States represented 1% versus 2%. Asia-Pacific remained the largest region at 72% of revenue.
Gross-margin expansion was attributed primarily to better capacity utilization, product mix, lower raw-material prices and lower share-based compensation allocated to cost of revenue. Operating expenses declined 2.8% to $165.9 million, largely because lower general and administrative share-based compensation offset higher personnel, IT, research and development, and selling costs. Research and development expense was $45.0 million.
Cash flow, liquidity and debt
- Cash, cash equivalents and restricted cash totaled $88.2 million at December 31, 2023, including $44.5 million of cash and cash equivalents, $37.5 million of current restricted cash and $6.2 million of non-current restricted cash. Short-term investments were $5.6 million.
- Consolidated working capital was $22.2 million. The company reported $403.4 million of current liabilities, including $112.6 million of accounts payable, $63.4 million of notes payable, $148.3 million of accrued expenses and other current liabilities, and $35.4 million of short-term bank borrowings.
- Total outstanding borrowings were $79.2 million at year-end, including $35.4 million due within 12 months. Long-term bonds payable were $43.2 million and are due in 2027.
- Operating cash outflow rose to $75.3 million, while investing cash outflow was $165.6 million, primarily due to manufacturing and facility capital expenditures. Financing activities provided $33.0 million, principally from bank borrowings.
- Approximately 74% of cash balances were held outside the United States. Repatriation may be restricted or subject to taxes and other costs, limiting availability for U.S. obligations.
Material changes versus the prior comparable period
- Revenue increased 50%, driven by increased sales volume and growth in Europe and Asia-Pacific.
- Gross margin improved substantially from 4.4% to 18.7%, and the operating and net losses narrowed.
- Cash and cash equivalents declined from $231.4 million to $44.5 million, while total cash, cash equivalents and restricted cash declined from $302.6 million to $88.2 million.
- Inventories increased from $84.3 million to $149.7 million, and accounts payable increased from $45.0 million to $112.6 million, reflecting expansion and working-capital pressure.
- Property, plant and equipment increased from $335.1 million to $620.7 million, including construction in progress of $321.9 million.
- Capital expenditures increased 24% to $186.8 million, while operating cash use increased 40%.
- Europe became a significantly larger revenue market, while U.S. revenue remained limited pending completion of the Clarksville facility.
Guidance, outlook, risks and unusual items
- Going concern: Management and the independent auditor stated that substantial doubt exists regarding the company’s ability to continue as a going concern for at least one year from issuance of the financial statements. The financial statements contain no adjustments for this uncertainty.
- Financing plan: Management was negotiating a proposed $150 million term loan, potentially alongside a $30 million working-capital loan, but the financing was not finalized as of issuance. Other alternatives include debt or equity issuance, asset sales or sale-leaseback transactions, and strategic alternatives. There is no assurance that financing will be obtained on acceptable terms.
- Clarksville obligations: The company reported $57.0 million of payables related to the Tennessee expansion, $5.5 million of notices of non-payment and approximately $31.9 million of mechanics liens. A supplier litigation seeks approximately $1.3 million plus fees and potential foreclosure remedies.
- Government funding: The DOE declined to award the previously announced $200 million grant for a Kentucky separator facility. The loss of the grant adversely affected the company’s financing efforts and delayed U.S. expansion.
- IRA credits: Potential U.S. Inflation Reduction Act credits, including the Section 45X credit, are dependent on the Clarksville facility becoming operational. The company is foregoing potential credits until then.
- Outlook: Management expects continued emphasis on the 53.5Ah cell, ESS containers and growth in Europe and the United States. A new short-duration ESS product is expected to begin initial deliveries in the fourth quarter of 2024, while the timing of Clarksville production remains dependent on financing.
- Customer concentration: The top five customers represented 48.6% of 2023 revenue; two customers individually represented 18% and 11%.
- Control deficiency: Management identified a material weakness in IT general controls, specifically user and privileged-access controls affecting financial systems. Remediation was underway but had not been fully implemented and tested as of year-end.
- Litigation: The company faces shareholder, securities and derivative litigation relating principally to merger disclosures, the DOE grant, profitability and China-related operations. Potential losses cannot currently be reasonably estimated.
- Unusual items: Product warranty liabilities totaled $35.2 million at year-end. The filing also highlights a prior $46.5 million warranty accrual in 2021 related to a legacy product component; the 2023 warranty provision was $12.7 million.
Most important facts for investors to verify
- Whether the proposed term loan, working-capital financing or another funding transaction closes, and on what terms.
- Whether the company can satisfy current liabilities, Clarksville payables, mechanics liens and capital commitments without substantial dilution or additional secured debt.
- The timing, cost and qualification status of the Clarksville Phase 1A facility, including its ability to generate U.S. domestic-content and IRA credits.
- Whether the $276.4 million backlog converts into shipments and cash collections as projected, particularly the revised ESS project scheduled to begin deliveries in the second quarter of 2024.
- Cash availability at the parent company versus foreign subsidiaries and the practical ability to repatriate funds.
- Progress in remediating the material weakness in IT general controls.
- The outcome and potential financial exposure from shareholder, securities, derivative and Tennessee construction litigation.
- Customer concentration, inventory growth, warranty claims and the sustainability of the 18.7% gross margin.