Microvast (MVST) - 2021 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) The unaudited statements show a significant increase in cash and equity post-recapitalization, alongside a higher net loss from increased operating expenses Condensed Balance Sheet The balance sheet reflects substantial growth in assets and a shift from shareholder deficit to equity following the reverse recapitalization Total Assets: | Metric | Dec 31, 2020 (in thousands) | Sep 30, 2021 (in thousands) | Change | | :--- | :--- | :--- | :--- | | Total Assets | $404,510 | $990,356 | +144.8% | | Cash and cash equivalents | $21,496 | $572,609 | +2563.9% | | Restricted cash | $19,700 | $39,900 | +102.5% | | Accounts receivable, net | $76,298 | $67,243 | -11.9% | | Inventories, net | $44,968 | $47,820 | +6.3% | Total Liabilities: | Metric | Dec 31, 2020 (in thousands) | Sep 30, 2021 (in thousands) | Change | | :--- | :--- | :--- | :--- | | Total Liabilities | $389,162 | $273,572 | -29.7% | | Accounts payable | $42,007 | $36,557 | -13.0% | | Short-term bank borrowings | $12,184 | $22,851 | +87.5% | | Bonds payable | $29,915 | $- | -100.0% | | Warrant liability | $- | $2,461 | N/A | Shareholders' Equity: | Metric | Dec 31, 2020 (in thousands) | Sep 30, 2021 (in thousands) | Change | | :--- | :--- | :--- | :--- | | Total Shareholders' (Deficit)/Equity | $(384,602) | $716,784 | N/A (from deficit to equity) | | Common Stock (shares) | 99,028,297 | 300,522,394 | +203.5% | | Additional paid-in capital | $- | $1,291,199 | N/A | | Accumulated deficit | $(397,996) | $(585,460) | +47.1% (increase in deficit) | Condensed Statements of Operations The statements of operations detail a rise in revenues overshadowed by a much larger increase in costs, leading to a significant net loss Three Months Ended September 30: | Metric | 2020 (in thousands) | 2021 (in thousands) | Change | | :--- | :--- | :--- | :--- | | Revenues | $30,753 | $36,894 | +20.0% | | Cost of revenues | $(27,075) | $(72,779) | +168.8% | | Gross profit/(loss) | $3,678 | $(35,885) | -1075.7% | | Loss from operations | $(9,096) | $(113,296) | +1145.6% | | Net loss | $(10,089) | $(116,476) | +1054.5% | | Net loss per share (Basic and diluted) | $(0.22) | $(0.49) | +122.7% | Nine Months Ended September 30: | Metric | 2020 (in thousands) | 2021 (in thousands) | Change | | :--- | :--- | :--- | :--- | | Revenues | $59,400 | $85,204 | +43.4% | | Cost of revenues | $(50,950) | $(129,100) | +153.4% | | Gross profit/(loss) | $8,450 | $(43,896) | -619.5% | | Loss from operations | $(25,400) | $(146,471) | +476.7% | | Net loss | $(29,074) | $(159,844) | +449.8% | | Net loss per share (Basic and diluted) | $(0.65) | $(1.27) | +95.4% | Condensed Statement of Comprehensive Loss The statement shows a substantial increase in comprehensive loss, driven by higher net loss and negative foreign currency translation adjustments Comprehensive Income/(Loss): | Metric | Three Months Ended Sep 30, 2020 (in thousands) | Three Months Ended Sep 30, 2021 (in thousands) | Nine Months Ended Sep 30, 2020 (in thousands) | Nine Months Ended Sep 30, 2021 (in thousands) | | :--- | :--- | :--- | :--- | :--- | | Net loss | $(10,089) | $(116,476) | $(29,074) | $(159,844) | | Foreign currency translation adjustment | $10,867 | $(3,130) | $6,223 | $(2,373) | | Comprehensive income/(loss) | $778 | $(119,606) | $(22,851) | $(162,217) | Condensed Statements of Changes in Shareholders' Equity Shareholders' equity transformed from a deficit to a surplus, primarily due to common stock issuance from the reverse recapitalization Shareholders' Equity Evolution (Nine Months Ended Sep 30, 2021): | Metric | Jan 1, 2021 (in thousands) | Sep 30, 2021 (in thousands) | Change | | :--- | :--- | :--- | :--- | | Total Shareholders' (Deficit)/Equity | $(384,602) | $716,784 | +$1,101,386 | | Common Stock (shares) | 99,028,297 | 298,834,894 | +201.8% | | Additional paid-in capital | $- | $1,291,199 | N/A | | Accumulated deficit | $(397,996) | $(585,460) | +47.1% (increase in deficit) | - Issuance of common stock upon the reverse recapitalization, net of issuance costs of $42.8 million, contributed $1,241,671 thousand to equity[25] - Share-based compensation added $49,552 thousand, while net loss reduced equity by $(159,844) thousand[25] Condensed Statements of Cash Flows Cash flows shifted dramatically due to a significant inflow from financing activities, despite increased cash usage in operations and investing Cash Flow Summary (Nine Months Ended September 30): | Metric | 2020 (in thousands) | 2021 (in thousands) | Change | | :--- | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $5,799 | $(24,653) | -525.1% | | Net cash used in investing activities | $(14,425) | $(40,718) | +182.3% | | Net cash (used in) provided by financing activities | $(2,360) | $634,370 | N/A (from outflow to inflow) | | (Decrease) Increase in cash, cash equivalents and restricted cash | $(10,452) | $571,313 | N/A (from decrease to increase) | | Cash, cash equivalents and restricted cash at end of period | $31,332 | $612,509 | +1854.5% | - Key financing activities for the nine months ended September 30, 2021, included $747,791 thousand from Merger and PIPE financing, $57,500 thousand from issuance of convertible notes, and $26,603 thousand from bank borrowings, partially offset by $139,038 thousand in payments to exited noncontrolling interests[27] Notes to Unaudited Condensed Financial Statements The notes detail the reverse recapitalization, significant warranty and inventory provisions, and substantial stock-based compensation expenses - The Merger on July 23, 2021, was accounted for as a reverse recapitalization, raising approximately $708.4 million in proceeds[37][52][57] - A significant increase in product warranty provision was recorded, with an additional accrual of $34.1 million for the three months and $40.8 million for the nine months ended September 30, 2021[63][199] - Total stock-based compensation expense for the nine months ended September 30, 2021, was $58.29 million[27][124][125] - The company assumed Public and Private Warrants upon the Merger, with the Private Warrants recognized as a liability and remeasured, resulting in a $1.1 million gain[81][86] - Provision for obsolete inventories increased significantly to $12.7 million for the nine months ended September 30, 2021, from $1.3 million in the prior year period[60][221] - Capital commitments for construction and equipment were $46.1 million as of September 30, 2021, with lease commitments totaling $34.0 million[137][138] - In October 2021, the company granted new RSUs and PSUs and acquired a building in Florida for $11.0 million for R&D projects[139][140] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the financial impact of the Business Combination, strategic focus, and factors driving increased revenue and significant net losses Completion of the Business Combination The merger with Tuscan Holdings Corp, accounted for as a reverse recapitalization, was completed on July 23, 2021 - The Business Combination, a merger between Tuscan Holdings Corp and Microvast, Inc, closed on July 23, 2021, and was accounted for as a reverse recapitalization with Microvast, Inc as the accounting acquirer[143][146] - The transaction involved the issuance of shares to former Microvast owners, Bridge Notes holders, and PIPE investors, raising approximately $708.4 million in proceeds[52][165] Company's Business following the Business Combination The company designs and manufactures innovative, vertically integrated lithium battery systems for commercial vehicles and energy storage applications - Microvast is a technology innovator in lithium batteries, designing, developing, and manufacturing battery systems with ultra-fast charging, long life, and superior safety[147] - The company offers a broad range of cell chemistries and is vertically integrated, producing key battery components like cathode, anode, electrolyte, and separator[148][149] - Microvast focuses on commercial vehicles and high-performance energy storage applications, expanding its market presence from Asia & Pacific to Europe and the United States[148][151] Battery Systems Sales & Backlog: | Metric | As of Sep 30, 2020 | As of Sep 30, 2021 | Change | | :--- | :--- | :--- | :--- | | Total battery systems sold (MWh) | N/A | ~2,422.3 | N/A | | Backlog order (USD in millions) | ~$31.9 | ~$52.7 | +65.2% | | Backlog order (MWh equivalent) | ~90.8 | ~214.6 | +136.3% | Key Factors Affecting Our Performance Performance is driven by technology innovation, market demand, manufacturing capacity, geographic sales mix, cost management, and regulatory factors - Future success is dependent on continuous technology and product innovation, requiring ongoing R&D investment[154] - Market demand for battery systems is driven by the growth of electric vehicle and energy storage markets, influenced by innovation, economic conditions, and government incentives[155] - Growth necessitates increased manufacturing capacity, with proceeds from the Business Combination earmarked for facility expansion[156] - Expanding sales into Europe and the United States is expected to yield higher gross margins compared to the PRC market[157] - Profitability is also affected by the ability to manage manufacturing costs, including raw material price fluctuations and achieving economies of scale[158] - The company operates within a regulatory landscape subject to environmental regulations, economic incentives, tax credits, and potential trade restrictions/tariffs[159] - The ongoing COVID-19 pandemic continues to adversely impact sales, operations, supply chains, and distribution systems[160] Basis of Presentation The company operates as a single segment, with historical financial results reported in U.S dollars according to U.S GAAP - The company conducts its business through one operating segment, with historical results reported in accordance with U.S GAAP and in U.S dollars[161] Liquidity and Capital Resources Liquidity was significantly enhanced by the Business Combination, providing sufficient capital to meet working capital needs for the next 12 months - As of September 30, 2021, the company's primary liquidity source was $572.6 million in cash and cash equivalents, significantly bolstered by $708.4 million in net proceeds from the Business Combination[162][165] - The company had $22.9 million in short-term bank borrowings and $73.1 million in long-term convertible bonds as of September 30, 2021[163] - Approximately $80.7 million of cash was held by PRC subsidiaries, which would incur a 10% withholding tax if repatriated to the U.S[164] - Management believes the company will be able to meet its working capital requirements for at least the next 12 months[165] Cash Flows A substantial net cash inflow from financing activities offset increased cash outflows from operating and investing activities Cash Flow Summary (Nine Months Ended September 30): | Metric | 2020 (in thousands) | 2021 (in thousands) | Change | | :--- | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $5,799 | $(24,653) | -525.1% | | Net cash used in investing activities | $(14,425) | $(40,718) | +182.3% | | Net cash (used in) provided by financing activities | $(2,360) | $634,370 | N/A (from outflow to inflow) | Cash Flows from Operating Activities Operating cash flow turned negative due to a higher net loss and various non-cash adjustments - Operating activities used $24.7 million in cash for the nine months ended September 30, 2021, a decrease from $5.8 million generated in the prior year, primarily due to a higher net loss and non-cash adjustments[167] - Key adjustments included $14.4 million in depreciation, $9.9 million loss on changes in fair value of convertible notes, and a $1.1 million gain on changes in fair value of warrant liability[167] Cash Flows from Investing Activities Cash used in investing activities increased significantly due to capital expenditures for property and equipment to support expansion - Investing activities used $40.7 million in cash for the nine months ended September 30, 2021, primarily for capital expenditures related to property and equipment for expansion plans[168] Cash Flows from Financing Activities Financing activities generated a substantial cash inflow, driven by proceeds from the Merger, PIPE financing, and convertible notes - Financing activities generated $634.4 million in cash for the nine months ended September 30, 2021, driven by $708.4 million from Merger and PIPE financing, $26.6 million from bank borrowings, and $57.5 million from convertible notes[169] - These inflows were partially offset by $15.7 million in bank borrowing repayments and $139.0 million in payments to exited noncontrolling interests[169] Components of Results of Operations Results are driven by battery sales revenue, manufacturing costs, operating expenses for growth, and various other income and tax items - Revenue is primarily derived from sales of electric battery products, with a historical focus on the Asia & Pacific region, now expanding internationally[171] - Cost of revenues includes manufacturing costs, personnel expenses, warranty costs, and depreciation directly attributable to production[172] - Operating expenses are expected to increase in absolute dollars due to increased headcount, marketing programs, and R&D investments[174][175][176] - Subsidy income consists of non-recurring government grants, while other income includes interest and foreign exchange gains/losses[177][178] - Income tax expense is subject to varying statutory rates across the U.S, PRC, Germany, and the U.K, with preferential rates for 'High and New Tech Enterprises' in the PRC[179][180] Results of Operations The company's operational results show revenue growth but a significant decline in gross margin and a substantial increase in operating loss Comparison of the Three Months Ended September 30, 2021 to the Three Months Ended September 30, 2020 Revenue grew by 20%, but a massive increase in cost of revenues, driven by warranty costs, led to a significant gross loss Three Months Ended September 30: | Metric | 2020 (in thousands) | 2021 (in thousands) | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Revenues | $30,753 | $36,894 | $6,141 | 20.0% | | Cost of revenues | $(27,075) | $(72,779) | $(45,704) | 168.8% | | Gross profit/(loss) | $3,678 | $(35,885) | $(39,563) | (1,075.7)% | | Operating loss | $(9,096) | $(113,296) | $(104,200) | 1,145.6% | | Loss before income tax | $(10,359) | $(116,370) | $(106,011) | 1,023.4% | | Loss | $(10,089) | $(116,476) | $(106,387) | 1,054.5% | - Revenue increased by 20.0% to $36.9 million, primarily driven by increased sales of battery cell products in the Asia & Pacific region[183] - Gross profit decreased significantly to a loss of $(35.9) million (-97.3% margin), mainly due to a $35.6 million increase in product warranty cost[185][187] - Operating expenses surged, with General and Administrative increasing by 1,108.6% to $(57.1) million, primarily due to increased headcount and share-based compensation[188][189][190] - A loss of $3.0 million was incurred from changes in the fair value of convertible notes, while a gain of $1.1 million resulted from changes in the fair value of warrant liability[191][192] Comparison of the Nine Months Ended September 30, 2021 to the Nine Months Ended September 30, 2020 Revenue grew by 43.4%, but a substantial increase in warranty costs and operating expenses resulted in a significantly larger net loss Nine Months Ended September 30: | Metric | 2020 (in thousands) | 2021 (in thousands) | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Revenues | $59,400 | $85,204 | $25,804 | 43.4% | | Cost of revenues | $(50,950) | $(129,100) | $(78,150) | 153.4% | | Gross profit/(loss) | $8,450 | $(43,896) | $(52,346) | (619.5)% | | Operating loss | $(25,400) | $(146,471) | $(121,071) | 476.7% | | Loss before income tax | $(29,069) | $(159,520) | $(130,451) | 448.8% | | Loss | $(29,074) | $(159,844) | $(130,770) | 449.8% | - Revenue increased by 43.4% to $85.2 million, primarily driven by increased sales of battery cell products in the Asia & Pacific region[195] - Gross profit decreased significantly to a loss of $(43.9) million (-51.5% margin), mainly due to a $44.6 million increase in product warranty cost[197][199] - Operating expenses surged, with General and Administrative increasing by 435.2% to $(67.8) million, primarily due to increased headcount, expansion, and share-based compensation[200][201][202] - Subsidy income increased by 233.7% to $2.7 million, primarily due to a one-time award from local governments in the PRC[203] - A loss of $9.9 million was incurred from changes in the fair value of convertible notes, while a gain of $1.1 million resulted from changes in the fair value of warrant liability[204][205] Contractual Obligations The company has significant contractual obligations, including lease commitments and substantial planned capital expenditures for capacity expansion Contractual Obligations (as of Dec 31, 2020): | Obligation Type | Total (in thousands) | Less than 1 Year (in thousands) | 1 – 3 Years (in thousands) | 3 – 5 Years (in thousands) | More than 5 years (in thousands) | | :--- | :--- | :--- | :--- | :--- | :--- | | Bond Payable* | $29,915 | $29,915 | $— | $— | $— | | Deposit liability for series B2 convertible preferred shares* | $21,792 | $21,792 | $— | $— | $— | | Interest | $42,180 | $11,298 | $24,976 | $5,741 | $165 | | Lease commitments | $34,042 | $3,539 | $6,377 | $4,451 | $19,675 | | Purchase obligations | $8,396 | $8,396 | $— | $— | $— | | Capital commitments | $30,706 | $29,264 | $1,442 | $— | $— | | Total | $167,031 | $104,204 | $32,795 | $10,192 | $19,840 | *Converted to equity in connection with the Business Combination. - The company plans approximately $420 million in capital expenditures for capacity expansion in China, Germany, and Tennessee, expected to be completed by Q2 2023[207] Critical Accounting Policies Key accounting policies involve significant judgments in revenue recognition, product warranty, inventory valuation, income taxes, and stock-based compensation - Revenue from lithium battery sales is recognized when control of goods or services is transferred to the customer[212] - Product warranty costs are estimated and reserved at the time of sale, with a significant additional accrual of $34.1 million made in Q3 2021 for legacy products[217][219] - Inventories are valued at the lower of cost or net realizable value, with impairment losses of $12.7 million recorded for the nine months ended September 30, 2021[220][221] - Income taxes involve recognizing deferred taxes for temporary differences and establishing valuation allowances for deferred tax assets[222][223] - Stock-based compensation expense is recognized straight-line over the service period, with quarterly probability assessments for performance conditions leading to potential volatility[224][225] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks including limited interest rate risk, foreign currency risk from the Renminbi, and credit risk Interest Rate Risk The company's exposure to interest rate risk is limited due to the short maturity of its cash equivalents and variable rates on borrowings - The company's interest rate risk is limited due to short maturity cash equivalents and variable interest rates on borrowings[226] - A 100 basis point change in interest rates is not expected to materially affect operating results or financial condition[227] Foreign Currency Risk The primary foreign currency risk arises from Renminbi-denominated transactions in the PRC, which are not currently hedged - The company faces foreign currency risk primarily from Renminbi-denominated transactions in the PRC[228] - An immediate 10% adverse change in Renminbi exchange rates would result in a $1.7 million foreign currency loss as of September 30, 2021[228] - The company does not currently use derivatives to hedge this risk but may consider it in the future[228] Credit Risk Credit risk is managed by extending credit to clients with good ratings and closely monitoring receivables for potential impairment - Credit risk primarily relates to trade and other receivables, restricted cash, cash equivalents, and amounts due from related parties[229] - Risk is mitigated by granting credit to clients with good ratings and closely monitoring overdue debts[229][230] Seasonality Sales typically exhibit seasonality, with higher volumes in the third and fourth quarters due to purchasing patterns around the Chinese Spring Festival - The company typically experiences higher sales during its third and fourth fiscal quarters due to reduced purchases from Chinese bus OEMs during the Chinese Spring Festival holiday[231] - Limited operational history makes it difficult to precisely judge the exact nature or extent of the seasonality of the business[231] Item 4. Controls and Procedures Management identified two material weaknesses in internal controls, rendering disclosure controls ineffective, and is implementing remediation measures Evaluation of Disclosure Controls and Procedures Management concluded that disclosure controls were not effective as of September 30, 2021, due to two identified material weaknesses - As of September 30, 2021, management concluded that the company's disclosure controls and procedures were not effective due to two identified material weaknesses[232] - Despite the material weaknesses, management believes the condensed consolidated financial statements fairly represent the financial condition, results of operations, and cash flows[232] Material Weakness The company identified material weaknesses related to insufficient U.S GAAP/SEC expertise and a lack of comprehensive accounting policies - Two material weaknesses were identified: insufficient financial reporting and accounting personnel with appropriate U.S GAAP knowledge and a lack of comprehensive accounting policies and procedures[234] - These deficiencies could lead to significant misstatements in future consolidated financial statements[234] - Remediation plans include hiring additional qualified accounting personnel, streamlining reporting processes, and documenting key controls[235] Changes in Internal Control Over Financial Reporting The company is actively implementing measures post-Business Combination to address material weaknesses and enhance its internal control framework - Following the Business Combination, the company is actively implementing measures to address identified material weaknesses and integrate acquired operations[239][240] - Remediation actions include hiring qualified financial staff, establishing comprehensive accounting policies, and implementing IT controls for SOX compliance[240] - As an emerging growth company, the company may take advantage of an exemption from the auditor attestation requirement under Section 404 of the Sarbanes-Oxley Act[241] Limitations on Effectiveness of Controls and Procedures Management acknowledges that all control systems have inherent limitations and can only provide reasonable, not absolute, assurance - Management acknowledges that disclosure controls and internal control over financial reporting are designed to provide reasonable, not absolute, assurance[242] - Due to inherent limitations, control systems cannot prevent or detect all errors and fraud[242] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company is involved in various legal proceedings but does not expect them to have a material adverse effect on its financial condition - The company is involved in various legal proceedings, including a lawsuit by a former employee alleging breach of contract and discrimination, with the trial reset to early 2022[135][245] - Management does not currently believe that the outcome of any litigation will have a material adverse effect on the company's business, operating results, cash flows, or financial condition[245] Item 1A. Risk Factors Investors are directed to the company's Registration Statement on Form S-1 and subsequent filings for current risk factors post-Business Combination - Certain risk factors previously disclosed in the Annual Report on Form 10-K may no longer apply after the Business Combination[246] - For current risk factors, refer to the 'Risk Factors' section in the Registration Statement on Form S-1 (File No. 333-258978) and subsequent SEC filings[246] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds from Registered Securities Information on unregistered sales of equity securities was previously filed in a Form 8-K and is not repeated in this report - Information regarding unregistered sales of equity securities was included in a Current Report on Form 8-K and is not required to be furnished herein[247] Item 3. Defaults Upon Senior Securities The company reported no defaults upon senior securities during the period - No defaults upon senior securities were reported[248] Item 4. Mine Safety Disclosures This item is not applicable to the company's operations - This item is not applicable[249] Item 5. Other Information No other information is reported under this item for the period - No other information is reported under this item[250] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including merger agreements, corporate documents, and executive certifications - The exhibits include the Agreement and Plan of Merger, corporate governance documents, various Employment Agreements, the 2021 Equity Incentive Plan, and certifications from the Principal Executive and Financial Officers[253]