Microvast Holdings, Inc. — Q3 2021 Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2021. The unaudited financial statements are presented in U.S. dollars, with amounts generally in thousands. Microvast develops, manufactures and sells lithium-battery systems and components for electric vehicles and energy-storage applications, primarily in China and Europe.
Business context and reporting period
- On July 23, 2021, Tuscan Holdings Corp. completed its merger with Microvast, Inc. and was renamed Microvast Holdings, Inc. The transaction was accounted for as a reverse recapitalization, with Microvast, Inc. treated as the accounting acquirer.
- The Business Combination included approximately $482.5 million of PIPE financing and approximately $708.4 million of aggregate proceeds, including cash from the former Tuscan trust account and PIPE financing.
- As of September 30, 2021, backlog was approximately $52.7 million, or 214.6 MWh, compared with $31.9 million and 90.8 MWh at September 30, 2020.
Financial performance and liquidity
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Revenue | $36.9 million | $30.8 million | $85.2 million | $59.4 million |
| Gross profit/(loss) | $(35.9) million | $3.7 million | $(43.9) million | $8.5 million |
| Gross margin | (97.3%) | 12.0% | (51.5%) | 14.2% |
| Operating loss | $(113.3) million | $(9.1) million | $(146.5) million | $(25.4) million |
| Net loss | $(116.5) million | $(10.1) million | $(159.8) million | $(29.1) million |
| Net loss attributable to common shareholders | $(120.0) million | $(21.9) million | $(187.5) million | $(64.6) million |
| Basic and diluted loss per share | $(0.49) | $(0.22) | $(1.27) | $(0.65) |
- Revenue increased 20.0% year over year in Q3 and 43.4% in the first nine months, primarily from higher battery-cell sales to new and existing customers in Asia and Pacific markets.
- Asia and Pacific revenue represented 86% of Q3 revenue and 87% of nine-month revenue in 2021. Europe represented 13% in both periods, down from 21% and 27%, respectively, in the comparable 2020 periods.
- Operating expenses increased to $78.0 million in Q3 and $105.3 million for the nine months, driven largely by share-based compensation, increased administrative and technical staffing, expanded research and development, and international sales activity.
- Q3 2021 share-based compensation expense was approximately $58.4 million; nine-month cash-flow adjustments included $58.3 million of share-based compensation.
- Cash and cash equivalents were $572.6 million at September 30, 2021; restricted cash was $39.9 million. Total cash, cash equivalents and restricted cash were $612.5 million.
- Total assets were $990.4 million, total liabilities were $273.6 million, and shareholders’ equity was $716.8 million at September 30, 2021.
- Nine-month operating cash flow was negative $24.7 million, investing cash flow was negative $40.7 million, and financing cash flow was positive $634.4 million. Capital expenditures were $40.7 million.
- Bank borrowings were $22.9 million and long-term convertible bonds were $73.1 million at quarter-end. The convertible bonds mature in 2023, 2024 and 2026. The company stated that it was in compliance with material debt covenants.
Material changes versus the prior comparable period
- Gross margin deteriorated from 12.0% to (97.3%) in Q3 and from 14.2% to (51.5%) for the first nine months.
- The company recorded a significant warranty estimate increase related to legacy products sold in 2017 and 2018. The additional accrual was approximately $34.1 million in the third quarter and $44.6 million for the nine months; total product-warranty liabilities reached $51.9 million at September 30, 2021.
- Management attributed margin pressure to warranty costs, higher material prices, disposal of legacy inventory at or below cost, share-based compensation, lower manufacturing-line utilization caused by the semiconductor shortage, and a greater proportion of lower-priced PRC sales.
- Inventory-obsolescence provisions increased to $12.7 million for the nine months from $1.3 million in the comparable period.
- The company issued approximately 191.3 million shares in the reverse recapitalization, net of issuance costs, and had approximately 298.8 million shares outstanding at September 30, 2021.
- The former preferred shares, certain convertible obligations and redeemable noncontrolling interests were converted or settled in connection with the merger, while the transaction materially increased paid-in capital and liquidity.
Guidance, outlook, risks and unusual items
- Management expects to use Business Combination proceeds for working capital, manufacturing expansion and capital expenditures and stated that available liquidity should meet working-capital requirements for at least the next 12 months.
- Capacity expansion projects in Huzhou, China; Berlin, Germany; and Clarkesville, Tennessee were expected to be completed by the second quarter of 2023, adding approximately 4 GWh of production capacity. Estimated total capital expenditures for these projects were approximately $420 million.
- The company is negotiating with the supplier of the component associated with the legacy-product warranty issue and stated that it may pursue legal action if necessary. Recovery from the supplier is not assured.
- COVID-19 adversely affected sales, operations, supply chains and deliveries, including a one-month factory shutdown and customer purchase deferrals.
- Other principal risks include operations in China, supply-chain and customer concentration, raw-material prices, semiconductor shortages, intense competition, evolving battery technology, regulatory and tariff changes, reduced government incentives, foreign-exchange exposure, intellectual-property protection, product liability, and the need for additional capital if expansion costs or operating losses exceed expectations.
- The company disclosed two material weaknesses in internal control over financial reporting: insufficient personnel with appropriate U.S. GAAP and SEC-reporting expertise, and the lack of comprehensive accounting policies and closing procedures. Disclosure controls were therefore concluded to be ineffective as of September 30, 2021.
- The company disclosed pending litigation by a former employee involving alleged contract, discrimination and retaliation claims. The potential loss was not reasonably estimable and no accrual was recorded.
- Subsequent events included repayment of the German bank facility in October 2021, a $11.0 million Florida building acquisition, and grants of 265,399 RSUs and 265,399 PSUs.
Important facts for investors to verify
- Whether the substantial warranty reserve is sufficient and whether any supplier recovery will offset the cost.
- Whether management can restore positive gross margins despite material costs, product quality issues, inventory impairments and low manufacturing utilization.
- Progress, timing and final cost of the approximately $420 million capacity-expansion program and its funding requirements.
- Remediation of the disclosed material weaknesses and the reliability of subsequent SEC financial reporting.
- Actual cash burn, availability of cash held by PRC subsidiaries, repatriation restrictions and the effect of potential withholding taxes.
- Customer concentration, backlog conversion, order cancellations or deferrals, and the impact of COVID-19 and semiconductor shortages.
- Potential dilution from warrants, options, restricted awards and up to approximately 20.0 million earn-out shares.