Microvast Holdings, Inc. quarterly report, Q2 FY2023

Microvast Holdings, Inc. — Form 10-Q Summary

Reporting period: Quarter and six months ended June 30, 2023. The unaudited results cover Microvast’s global business developing, manufacturing and selling lithium-ion battery components and systems for electric vehicles and energy storage systems.

Business Context and Reporting Period

Microvast operates in one reportable segment and serves customers in the PRC, other Asia-Pacific countries, Europe and the United States.
Revenue is primarily generated from lithium-ion battery products. The company reported approximately $675.9 million of battery-system backlog, equivalent to approximately 2,559.5 MWh, with more than 90% attributable to the U.S. and Europe.
Management expects to fulfill a majority of the backlog during 2023 and 2024, subject to customer orders, production capacity and other execution risks.

Financial Results and Key Metrics

Metric	Three Months Ended June 30	Six Months Ended June 30
Revenue	$75.0 million, up 16.4%	$121.9 million, up 20.6%
Gross profit	$11.5 million	$16.3 million
Gross margin	15.3%, versus 7.5%	13.4%, versus 4.8%
Operating loss	$26.9 million	$58.2 million
Net loss	$26.1 million	$55.6 million
Net loss attributable to shareholders	$26.1 million; $0.08 per share	$55.7 million; $0.18 per share

Revenue growth was primarily driven by higher sales volume: approximately 270.2 MWh in the quarter and 402.8 MWh in the six-month period, compared with 252.6 MWh and 366.6 MWh, respectively, in the prior-year periods.
Management attributed gross-margin improvement to better economies of scale, more favorable product mix and lower raw-material prices.
Operating expenses declined 22.7% in the quarter and 19.8% for the six-month period, largely because of lower share-based compensation, particularly in general and administrative expense.
Interest income increased to $1.5 million for the quarter and $2.9 million for the six-month period, while interest expense declined to $0.5 million and $0.9 million, respectively.
No income tax expense was recorded in either comparable period.

Cash Flow, Liquidity and Capital Structure

At June 30, 2023, cash and cash equivalents were $142.8 million, restricted cash was $27.6 million and short-term investments were $25.5 million. Total cash, cash equivalents, restricted cash and short-term investments were approximately $195.8 million.
Cash, cash equivalents and restricted cash declined from $302.6 million at December 31, 2022 to $170.3 million at June 30, 2023.
Six-month operating cash flow was negative $41.0 million, compared with negative $63.5 million in the prior-year period.
Six-month investing cash flow was negative $93.4 million, primarily reflecting capital expenditures for manufacturing capacity and property and equipment, compared with negative $67.9 million in the prior-year period.
Six-month financing cash flow was positive $5.3 million, reflecting $9.2 million of borrowings partly offset by $3.9 million of repayments.
Bank borrowings totaled $49.1 million at June 30, 2023, including $18.1 million current and $31.0 million non-current. Long-term bonds payable totaled $43.9 million and are scheduled to be repaid by January 2027 under the amended repayment schedule.
The company stated that it was in compliance with material debt covenants. Certain buildings, land-use rights, machinery and equipment, and receivables were pledged as collateral.
Approximately $37.0 million of cash was held by PRC subsidiaries, $16.1 million by German subsidiaries and $0.3 million by the UK subsidiary; these funds may not be readily available for U.S. operations without repatriation and potential withholding taxes.
Capital commitments for construction and property and equipment were $135.5 million, and non-cancelable purchase commitments were $58.8 million, as of June 30, 2023.

Material Changes Versus the Prior Comparable Period

Revenue increased $10.5 million in the second quarter and $20.8 million for the first six months.
Gross profit increased $6.6 million in the quarter and $11.5 million for the six-month period, with gross margin expanding materially.
Net loss narrowed by $18.1 million in the quarter and $32.3 million for the six-month period.
PRC revenue increased to 62% of quarterly revenue and 65% of six-month revenue, while other Asia-Pacific revenue declined as a percentage of total revenue. Europe increased to 13% of quarterly revenue and 16% of six-month revenue; U.S. revenue remained approximately 1% to 2%.
Property, plant and equipment increased from $335.1 million at year-end 2022 to $497.8 million at June 30, 2023, reflecting ongoing capacity expansion.
Accrued expenses and other current liabilities increased from $66.7 million to $116.4 million, primarily because payables for property, plant and equipment increased to $83.0 million.
The previously announced $200 million Department of Energy grant, for a proposed polyaramid separator facility, was declined on May 23, 2023. Management stated that it remains committed to U.S. investment and completion of the Clarksville, Tennessee facility but will focus on its core business in the near term.

Guidance, Outlook, Risks and Unusual Items

The Huzhou, China expansion is expected to ramp toward its 2 GWh design capacity during the second half of 2023.
The 2 GWh Clarksville, Tennessee expansion is expected to enter trial production in the fourth quarter of 2023, with customer shipments anticipated in the first quarter of 2024. The two projects are expected to add 4 GWh of capacity when operational.
Total capital expenditures for the Huzhou and Clarksville expansions are estimated at $460 million to $490 million. Management expects to finance the projects primarily with Business Combination proceeds and bank borrowings.
The company was negotiating an extension of the drawdown period for $70.1 million of undrawn capacity under its RMB800 million project-finance facility. If the extension is not approved, the company would lose access to the undrawn amount, although existing borrowings would remain unaffected.
Management stated that existing liquidity and anticipated operating and financing cash flows should fund operations for at least the next 12 months and the foreseeable future, while acknowledging that additional financing may be required for future expansion or acquisitions.
Key risks include continued operating losses, significant cash use and capital requirements, dependence on customer orders and backlog conversion, raw-material prices and availability, production ramp execution, intense competition, regulatory and government-incentive changes, operations in China, foreign-exchange exposure, intellectual-property protection, customer and supplier performance, product liability and litigation.
A 10% adverse change in foreign-exchange rates affecting Renminbi-denominated accounts was estimated to produce a $4.5 million foreign-currency loss. A hypothetical 100-basis-point increase in expected credit-loss rates would increase the allowance by approximately $0.7 million.
The company is defending stockholder litigation related to the predecessor Tuscan Holdings’ acquisition of Microvast. The potential loss could be material but cannot currently be reasonably estimated.
Share-based compensation expense was $18.0 million in the quarter and $36.1 million for the six-month period, reducing reported operating results but representing a substantial non-cash expense.

Most Important Facts for Investors to Verify

Whether the $675.9 million backlog converts into shipments and cash collections on the stated 2023–2024 timetable.
Progress, final cost and production performance of the Huzhou and Clarksville capacity expansions.
Availability of the $70.1 million undrawn project-finance facility and the company’s need for additional capital.
Whether gross-margin improvement is sustained as product mix, raw-material costs and production volumes change.
Cash burn, restricted or foreign-held cash, capital commitments and debt maturities relative to available liquidity.
Outcome and potential financial exposure from the Delaware stockholder litigation and other contingencies.
Customer concentration, geographic revenue shifts and the effect of government incentives, tariffs and other regulatory changes.