Microvast (MVST) - 2024 Q2 - Quarterly Report

Part I. Financial Information Financial Statements (Unaudited) Q2 2024 revenue increased, but a significant impairment charge resulted in a wider net loss, with H1 operating cash flow turning positive Condensed Consolidated Financial Statements Condensed Consolidated Balance Sheet Data (in thousands USD) | Account | June 30, 2024 | Dec 31, 2023 | | :--- | :--- | :--- | | Cash and cash equivalents | $68,183 | $44,541 | | Total Current Assets | $418,049 | $425,606 | | Total Assets | $984,559 | $1,096,732 | | Total Current Liabilities | $372,549 | $403,410 | | Total Liabilities | $506,456 | $532,542 | | Total Equity | $478,103 | $564,190 | Condensed Consolidated Statements of Operations (in thousands USD) | Metric | Q2 2024 | Q2 2023 | H1 2024 | H1 2023 | | :--- | :--- | :--- | :--- | :--- | | Revenues | $83,675 | $74,953 | $165,026 | $121,926 | | Gross Profit | $27,195 | $11,461 | $44,420 | $16,319 | | Impairment loss | ($64,912) | ($51) | ($64,912) | ($51) | | Loss from operations | ($75,626) | ($26,866) | ($98,744) | ($58,165) | | Net Loss | ($78,441) | ($26,078) | ($103,266) | ($55,649) | | Net Loss per Share (Basic & Diluted) | ($0.25) | ($0.08) | ($0.33) | ($0.18) | Condensed Consolidated Statements of Cash Flows (in thousands USD) | Cash Flow Activity | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :--- | :--- | :--- | | Net cash from operating activities | $2,142 | ($41,008) | | Net cash used in investing activities | ($7,442) | ($93,401) | | Net cash generated from financing activities | $28,488 | $5,293 | Notes to Financial Statements Highlights Notes highlight substantial doubt about going concern, a $64.9 million impairment, ongoing lawsuits, and a $25 million CEO loan, with revenue shifting to Europe - Management concluded substantial doubt exists about the Group's ability to continue as a going concern due to insufficient cash for future operations and capital needs, despite remedial plans[40][44] - An impairment loss of $64.9 million was recorded for H1 2024, primarily due to pausing construction of the Tennessee battery plant pending additional funding[56] - Multiple lawsuits, including shareholder actions and supplier contract disputes, are ongoing, with $36.0 million in liens and $2.4 million in non-payment notices as of June 30, 2024[118][124][130] - A $25 million convertible loan agreement with the CEO, Mr. Yang Wu, was secured in May 2024 to enhance liquidity, with tranches of $12 million and $13 million received in May and July 2024 respectively[106][107][132] Revenue by Geography (in thousands USD) | Region | Q2 2024 | Q2 2023 | H1 2024 | H1 2023 | | :--- | :--- | :--- | :--- | :--- | | Asia & Pacific | $35,653 | $64,642 | $86,139 | $100,403 | | Europe | $46,745 | $9,337 | $75,666 | $19,522 | | U.S. | $1,277 | $974 | $3,221 | $2,001 | | Total | $83,675 | $74,953 | $165,026 | $121,926 | Management's Discussion and Analysis (MD&A) MD&A discusses H1 2024 revenue growth and improved gross margin, but a $64.9 million impairment and liquidity issues raise substantial doubt about going concern, despite strategic shifts and CEO loan Business Overview and Strategy - The U.S. strategy is shifting to Lithium Iron Phosphate (LFP) cell production at the Tennessee facility, favoring LFP for Energy Storage Systems (ESS) due to cost, safety, and regulatory advantages[140][152] - As of June 30, 2024, the company reported an order backlog of approximately $278.6 million, with over 63% from European and U.S. customers[138] - The Huzhou, China capacity expansion completed in Q3 2023 is generating revenue, but the Tennessee expansion is on hold due to funding issues, with an uncertain completion timeline[151][152] Results of Operations Q2 2024 vs. Q2 2023 Performance (in thousands USD) | Metric | Q2 2024 | Q2 2023 | Change | Change % | | :--- | :--- | :--- | :--- | :--- | | Revenues | $83,675 | $74,953 | $8,722 | 11.6% | | Gross Profit | $27,195 | $11,461 | $15,734 | 137.3% | | Gross Margin | 32.5% | 15.3% | - | - | | Net Loss | ($78,441) | ($26,078) | ($52,363) | 200.8% | H1 2024 vs. H1 2023 Performance (in thousands USD) | Metric | H1 2024 | H1 2023 | Change | Change % | | :--- | :--- | :--- | :--- | :--- | | Revenues | $165,026 | $121,926 | $43,100 | 35.3% | | Gross Profit | $44,420 | $16,319 | $28,101 | 172.2% | | Gross Margin | 26.9% | 13.4% | - | - | | Net Loss | ($103,266) | ($55,649) | ($47,617) | 85.6% | - The significant increase in net loss for Q2 and H1 2024 was primarily due to a $64.9 million impairment loss on long-lived assets related to U.S. operations and the paused Tennessee plant[174][185] - Gross margin improved due to better economies of scale, a more favorable product mix with higher sales in Europe, and lower raw material prices[173][180] Liquidity and Capital Resources - The company has substantial doubt about its ability to continue as a going concern, as existing cash is projected to be insufficient for operations and capital needs over the next twelve months[146][188] - Liquidity measures include a $25 million CEO loan, an 82% reduction in U.S. workforce in Q2 2024, and attempts to sell non-core real estate assets[189][190][192] - The Tennessee expansion project is paused due to lack of financing, causing construction delays, increased costs, and an inability to meet U.S. operations' accounts payable[197] Market Risk Disclosures Primary market risks include interest rate exposure on China loans, foreign currency exchange risk with Chinese RMB, and credit risk on receivables, with a 10% RMB change potentially causing a $13.4 million loss - Significant foreign currency exchange risk exists, primarily with the Chinese RMB; a hypothetical 10% adverse change could result in a $13.4 million foreign currency loss[211] - Interest rate risk is present on project finance loans in China, which are tied to the Loan Prime Rate[209] - Credit risk exists in trade receivables; a hypothetical 100 basis point increase in expected loss rate would increase the allowance for credit losses by approximately $0.6 million[212] Controls and Procedures Disclosure controls and procedures were ineffective as of June 30, 2024, due to a material weakness in IT general controls related to ERP user access, with remediation ongoing - The CEO and CFO concluded that disclosure controls and procedures were not effective as of June 30, 2024[215] - Ineffectiveness stems from a material weakness in IT general controls, specifically inadequate user access controls for the ERP system, risking unauthorized financial data changes[217] - A remediation plan is underway to address the material weakness by removing inappropriate access and enhancing review processes, though it is not yet fully remediated[218] Part II. Other Information Legal Proceedings & Risk Factors The company faces significant pending legal proceedings with uncertain outcomes, and refers to its 2023 Form 10-K for comprehensive risk factor disclosures - The company is defending various pending legal proceedings with uncertain outcomes, potentially incurring adverse impacts from defense and settlement costs, as detailed in Note 16[221] - Readers are directed to the company's 2023 Annual Report on Form 10-K for a comprehensive overview of potential business risks[222]