Microvast Holdings, Inc. annual report, FY2021

Microvast Holdings, Inc. — FY2021 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2021. Although the request references 2021 Q4, this filing is an annual Form 10-K and primarily reports full-year results. The July 23, 2021 Business Combination with Tuscan Holdings Corp. was accounted for as a reverse recapitalization, with Microvast, Inc. as the accounting acquirer.

Business context

Microvast designs and manufactures lithium-ion battery cells, modules, packs and related components for commercial electric vehicles and energy storage systems. Its technologies include LTO, LFP, NMC-1 and NMC-2 chemistries, with an emphasis on fast charging, long cycle life and safety. Operations span the PRC, Europe and the United States.

2021 battery-system sales volume was approximately 489.2 MWh, compared with 302.6 MWh in 2020.
Year-end battery-system backlog was approximately $114.5 million, equivalent to approximately 444.8 MWh; most backlog was expected to be fulfilled in 2022.
Annual manufacturing capacity was approximately 3 GWh of cell, module and pack capacity at year-end, while management also described aggregate capacity of approximately 4 GWh including additional capabilities.
Management targeted approximately 11 GWh of annual capacity by 2025.

Financial performance and metrics

Metric	2020	2021	Change
Revenue	$107.5 million	$152.0 million	+41.3%
Gross profit/(loss)	$17.1 million	$(42.7) million	Declined $59.9 million
Gross margin	15.9%	(28.1)%	Down 44.0 percentage points
Operating loss	$(29.1) million	$(194.1) million	Loss increased $165.0 million
Net loss	$(33.6) million	$(206.5) million	Loss increased $172.9 million
Net loss per share	$(0.82)	$(1.26)	Based on recast share data
Cash flow from operations	$15.6 million provided	$45.0 million used	Declined $60.6 million
Capital expenditures	$18.6 million	$87.9 million	Increased $69.3 million

Revenue growth was driven primarily by higher sales volume in the Asia & Pacific region. Asia & Pacific revenue increased to $131.5 million, or 86% of total revenue, from $82.7 million, or 77%, in 2020. Europe revenue declined to $19.5 million from $24.3 million. One customer accounted for 11% of 2021 revenue, and the top five customers contributed 37.3%.

Profitability, unusual items and material changes

Cost of revenues increased 115.4% to $194.7 million, substantially exceeding revenue growth.
Warranty expense increased to $52.9 million from $3.5 million. A $46.5 million additional accrual resulted from a legacy product sold in 2017 and 2018 that is expected to require replacement before warranty expiration.
Inventory impairment increased to $18.3 million, including write-downs and disposal of legacy products; certain legacy products were sold at or below cost.
Manufacturing costs increased due to higher raw-material prices, semiconductor shortages and other cost inflation. Average selling price declined to $310.6 per kWh from $355.3 per kWh.
Operating expenses rose to $157.4 million from $49.2 million. Increases included $82.9 million in general and administrative expense, $34.4 million in research and development expense and $21.4 million in selling and marketing expense.
2021 operating expenses and cost of revenue included approximately $83.1 million of share-based compensation, compared with none reported in 2020, following modifications to equity awards in connection with the Business Combination.
The company recorded a $9.9 million loss from changes in the fair value of convertible Bridge Notes and a $2.5 million gain from changes in the fair value of warrant liabilities.
Subsidy income increased to $6.1 million, including a one-time local-government award; management characterizes subsidy income as non-recurring.

Cash, debt and liquidity

Cash and cash equivalents were $480.9 million at December 31, 2021, compared with $21.5 million at year-end 2020. Including restricted cash, total cash, cash equivalents and restricted cash was $536.1 million.
Approximately $48.3 million of cash was held by PRC subsidiaries, $3.6 million by the German subsidiary and $0.7 million by the U.K. subsidiary; repatriation may require withholding taxes and may be restricted by local regulations.
Bank borrowings were $13.3 million, generally bearing interest of 3.80% to 6.00% and maturing within four to 12 months.
Convertible bonds totaled $73.1 million, with maturities in 2023, 2024 and 2026 and stated interest rates ranging from 0% to 4%.
The Business Combination generated approximately $705.1 million of net proceeds, including PIPE proceeds. The company used $87.9 million for manufacturing expansion and $23.9 million for working capital during 2021.
Management planned approximately $446.0 million of additional capital expenditures for Huzhou and Clarksville expansions, expected to be completed in 2023. Capital commitments for construction and equipment were $225.2 million at year-end.
Lease obligations totaled approximately $30.1 million, and non-cancelable purchase commitments totaled $21.7 million, of which $20.6 million was short-term.
Management stated that existing liquidity was sufficient to fund operations, commitments and planned expansion for at least the next 12 months; however, the company expects continuing operating losses and may require additional capital over time.

Guidance, outlook and management commentary

Management expected operating and net losses to continue at least until significant production of higher-energy cell products, which was not expected before 2024 and could occur later.
The company intends to expand manufacturing in China, Europe and the United States, including the Berlin module and pack facility and the Clarksville, Tennessee facility.
Management expects international expansion, particularly in Europe and the United States, to support higher average selling prices and potentially higher gross margins than PRC sales.
COVID-19 continued to affect customer purchasing, supply chains, production schedules and delivery timing. Raw-material inflation and semiconductor shortages also affected costs.
Russia sales were less than 10% of 2021 revenue, but management expected those sales to increase significantly in 2022. The Russia-Ukraine conflict created risks involving sanctions, order cancellations, collections and supply-chain disruption.

Principal risks and contingencies

Profitability and execution: The company has incurred substantial losses, had an accumulated deficit of approximately $632.1 million at year-end and may never achieve sustained profitability.
Warranty and product liability: The $46.5 million legacy-product accrual may not cover future claims. Battery failures, fires, recalls or safety issues could lead to substantial liability and reputational damage.
Internal controls: Management and the auditor identified a material weakness related to insufficient U.S. GAAP and SEC-reporting expertise. Disclosure controls were deemed ineffective as of December 31, 2021, and remediation was ongoing.
Customer concentration: The top five customers represented 37.3% of 2021 revenue, and long sales cycles make forecasting difficult.
Supply chain and pricing: The company relies on limited suppliers for certain raw materials and experienced rising costs for PVDF, lithium salts, carbonates and other inputs. It generally does not hedge raw-material price exposure.
China-related risks: Significant operations remain in the PRC, exposing the company to regulatory intervention, foreign-exchange restrictions, limitations on dividends and capital transfers, data-security rules and uncertainty regarding the PRC legal system.
Audit and listing risk: The PCAOB was unable to inspect the company’s PRC-based auditor, Deloitte Touche Tohmatsu Certified Public Accountants LLP. The filing warned that failure to change auditors or otherwise comply with the Holding Foreign Companies Accountable Act could ultimately result in trading prohibition or delisting.
Legal contingency: A former employee lawsuit seeks ownership of approximately 416,702 recast shares and other relief. No loss accrual was recorded because the outcome and potential loss could not be reasonably estimated.
Financing and dilution: The company may require additional equity or debt financing. Outstanding warrants had an $11.50 exercise price and could dilute common stockholders if exercised.

Important facts for investors to verify

Whether the $46.5 million legacy-product warranty reserve is sufficient and whether supplier recovery or litigation could offset any costs.
Progress, cost and timing of the Huzhou and Clarksville expansions, including the approximately $446.0 million planned spending and $225.2 million of existing capital commitments.
Actual cash burn, operating-loss trajectory and remaining liquidity after expansion spending.
Remediation of the material weakness and whether subsequent filings demonstrate effective disclosure and financial-reporting controls.
Backlog conversion, customer concentration, order cancellations and the geographic mix of revenue and gross margins.
Availability and pricing of lithium, PVDF, carbonates, semiconductors and other critical materials.
Compliance with PRC regulatory, foreign-exchange, data-security and capital-transfer requirements, as well as PCAOB inspection and HFCAA listing requirements.
Potential dilution from warrants, equity awards, earn-out shares and future financing.