MICROVAST HOLDINGS, INC. References in this Report to the "Company," "Microvast Holdings, Inc. ," "Microvast ," "our," "us" or "we" refer toMicrovast Holdings, Inc. The following discussion and analysis of the Company's financial condition and results of operations should be read in conjunction with the unaudited interim condensed financial statements and the notes thereto contained elsewhere in this report. Certain information contained in the discussion and analysis set forth below includes forward-looking statements that involve risks and uncertainties. Completion of the Business Combination OnJuly 23, 2021 ,Microvast Holdings, Inc. (formerly known asTuscan Holdings Corp. ) consummated the previously announced acquisition ofMicrovast, Inc. , aDelaware corporation, pursuant to the Agreement and Plan of Merger datedFebruary 1, 2021 , betweenTuscan Holdings Corp. ,Microvast andTSCN Merger Sub Inc. , aDelaware corporation ("Merger Sub"), pursuant to which Merger Sub merged with and intoMicrovast , withMicrovast surviving the merger (the "Business Combination").
Company's Business following the Business Combination
We are a technology innovator for lithium ion batteries. We design, develop and
manufacture battery systems for electric vehicles and energy storage that
feature ultra-fast charging capabilities, long life and superior safety. Our
vision is to solve the key constraints in electric vehicle development and in
high-performance energy storage applications. We believe the ultra-fast charging
capabilities of our battery systems make charging electric vehicles as
convenient as fueling conventional vehicles. We believe that the long battery
life of our battery systems also reduces the total cost of ownership of electric
vehicles and energy storage applications.
We offer our customers a broad range of cell chemistries: lithium titanate oxide
("LTO"), lithium iron phosphate ("LFP"), nickel manganese cobalt version 1
("NMC-1") and nickel manganese cobalt version 2 ("NMC-2"). Based on our
customer's application, we design, develop and integrate the preferred chemistry
into our cell, module and pack manufacturing capabilities. Our strategic
priority is to offer these battery solutions for commercial vehicles and energy
storage systems. We define commercial vehicles as light, medium, heavy-duty
trucks, buses, trains, mining trucks, marine applications, automated guided and
specialty vehicles. For energy storage applications, we focus on
high-performance applications such as grid management and frequency regulation.
Additionally, as a vertically integrated battery company, we design, develop and
manufacture the following battery components: cathode, anode, electrolyte and
separator. We also intend to market our full concentration gradient ("FCG")
cathode and polyaramid separator to passenger car original equipment
manufacturers ("OEMs") and consumer electronics manufacturers.
As of March 31, 2022 , we had a backlog order of approximately $120.8 million for
our battery systems, equivalent to approximately 327.6 megawatt hours ("MWh"),
compared to a backlog order of approximately $65.1 million for our battery
systems, equivalent to approximately 184.2 MWh, as of March 31, 2021 . The
backlog increase was a result of increased customer demand for our products. Our
revenue for the three months ended March 31, 2022 increased $21.7 million , or
145.5%, compared to the same period in 2021.
After initially focusing on the PRC and the Asia & Pacific regions, we have
expanded and continue to expand our presence and product promotion to Europe and
the U.S. to capitalize on their rapidly growing electrification markets. We have
many prototype projects ongoing with regard to sports cars, commercial vehicles,
trucks, port equipment and marine applications with customers in the Western
Hemisphere. In addition, we are jointly developing electric power-train
solutions with leading commercial vehicle OEMs and a first-tier automotive
supplier using LTO, NMC-1 and NMC-2 technologies.
Key Factors Affecting Our Performance
We believe that our future success will be dependent on several factors,
including the factors discussed below. While these areas represent opportunities
for us, they also represent challenges and risks that we must successfully
address in order to continue the growth of our business and improve our results
of operations.
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Technology and Product Innovation Our financial performance is driven by development and sales of new products with innovative technology. Our ability to develop innovative technology has been and will continue to be dependent on our dedicated research team. As part of our efforts to develop innovative technology, inOctober 2021 , we expanded our research and development ("R&D") inOrlando by purchasing a 75,000 square foot facility dedicated to R&D. We plan to continue expanding our R&D presence in theU.S. We also plan to continue leveraging our knowledge base in the PRC and to continue expanding our R&D efforts there as well. We expect our results of operations will continue to be impacted by our ability to develop new products with improved performance and reduced ownership cost, as well as the cost of our R&D efforts. Market Demand Our revenue and profitability depend substantially on the demand for battery systems and battery components, which is driven by the growth of the commercial and passenger electric vehicle and energy storage markets. Many factors contribute to the development of the electric vehicles sector, including product innovation, general economic and political conditions, environmental concerns, energy demand, government support and economic incentives. While governmental economic incentives and mandates can drive market demand for electric vehicles, and as a result, battery systems and components, governmental economic incentives are being gradually reduced or eliminated. Any reduction or elimination of governmental economic incentives may result in reduced demand for our products and adversely affect our financial performance.
Manufacturing Capacity
Our growth depends on being able to meet anticipated demand for our products. In order to do this, we will need to increase our manufacturing capacity. As ofMarch 31, 2022 , we had a backlog of approximately$120.8 million for our battery systems, equivalent to approximately 327.6 MWh. So far, we have used$87.9 million and$41.1 million of the proceeds from the Business Combination to expand our manufacturing facilities and for the purchase of property and equipment associated with our existing manufacturing and R&D facilities, in 2021 and first quarter of 2022, respectively. This investment program allows us to increase our manufacturing output, enabling us to address our backlog and to capture growing market opportunities. We expect the total capital expenditures related to these capacity expansions in Huzhou,China andClarksville, Tennessee which will give us an additional 4 GWh of capacity, to be in the range of$446.0 million . Future capacity expansions will be carried out in a measured manner based on our ongoing assessment of medium- and long-term demand for our solutions. Any such capacity expansions will require significant additional capital expenditures and will require corresponding expansion of our supporting infrastructure, further development of our sales and marketing team, expansion of our customer base and strengthened quality control.
Sales Geographic Mix
After primarily being focused on the PRC andAsia & Pacific regions, we have expanded and are continuing to expand our presence and product promotion toEurope and theU.S. to capitalize on the rapidly growing electric vehicle markets in those geographies. As we continue to expand our geographic focus toEurope and theU.S. , we believe sales of our products inEurope and theU.S. will continue to generate higher gross margins because average sales prices for customers in theU.S. andEurope are typically significantly higher than the average sales prices in the PRC. It has been our experience that buyers inEurope and theU.S. are more motivated by the technologies, and the quality of our products than are buyers in the PRC, making them less sensitive to the price of our products than are similarly situated buyers in the PRC. Therefore, the geographic source of our revenue will have an impact on our revenue and gross margins. Manufacturing Costs Our profitability may also be affected by our ability to effectively manage our manufacturing costs. Our manufacturing costs are affected by fluctuations in the price of raw materials. If raw material prices increase, we will have to offset these higher costs either through price increases to our customers or through productivity improvements. Our ability to control our raw materials costs is also dependent on our ability to negotiate with our suppliers for a better price and our ability to source raw materials from reliable suppliers in a cost-efficient manner. In addition, we expect that an increase in our sales volume will enable us to lower our manufacturing costs through economies of scale. 26
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Regulatory Landscape
We operate in an industry that is subject to many established environmental regulations, which have generally become more stringent over time, particularly with respect to hazardous waste generation and disposal and pollution control. These regulations affect the cost of our products and our gross margins. We are also affected by regulations in our target markets such as economic incentives to purchasers of electric vehicles, tax credits for electric vehicle manufacturers, and economic penalties that may apply to a car manufacturer based on its fleet-wide emissions. Each of these regulations may expand the market size of electric vehicles, which would, in turn, benefit us. We have operations and sales in the PRC, theAsia & Pacific region,Europe and theU.S. and, as a result, changes in trade restrictions and tariffs could impact our ability to meet projected sales or margins.
COVID-19
To date, COVID-19 has had an adverse impact on our sales and operations. During the three months endedMarch 31, 2022 , we continued to face unanticipated challenges caused by the continued impact of global pandemic and emerging variants of the virus, in particular due to new lockdowns and restrictive measures inShanghai, China . The most recent lockdowns measures inChina began inMarch 2022 and have not yet directly impacted our manufacturing facility in Huzhou,China (located in a neighboring province toShanghai ). However, these lockdowns have impacted the operations of certain of our third-party suppliers, our ability to book transportation of goods to, from and throughShanghai (a major port), and the restrictive measures have further disrupted supply chains across many industries around the globe. These and future lockdown measures may impact our ability to produce and/or timely deliver goods and services to our clients globally and further disruptions to supply chains in the automotive industry may continue to reduce and/or delay our customers' demand for our products and services.
Basis of Presentation
We currently conduct our business through one operating segment. Our historical
results are reported in accordance with
Liquidity and Capital Resources
Since inception, we have financed our operations primarily from capital contributions from equity holders, the issuance of convertible notes and bank borrowings. We expect existing cash, cash equivalents, short-term marketable securities, and cash flows from operations and financing activities to continue to be sufficient to fund our operating activities and cash commitments for investing and financing activities for at least the next 12 months and thereafter for the foreseeable future.
As of
The consolidated net cash position as ofMarch 31, 2022 included cash and cash equivalents of$20.1 million ,$3.2 million and$0.3 million held by our PRC, German andUK subsidiaries, respectively, that is not available to fund domestic operations unless funds are repatriated. Should we need to repatriate to theU.S. part or all of the funds held by our international subsidiaries in the form of a dividend, we would need to accrue and pay withholding taxes. We do not intend to pay any cash dividends on our common stock in the foreseeable future and intend to retain all of the available funds and any future earnings for use in the operation and expansion of our business in the PRC,Europe and theU.S. We continue to assess the effect of the COVID-19 pandemic as well as theRussia /Ukraine crisis on our operations. The extent to which the COVID-19 pandemic will impact our business and operations will depend on future developments that are highly uncertain and cannot be predicted with confidence, such as the continuing spread of the infection, new and emerging variants of the virus, the duration of the pandemic, and the effectiveness of actions taken in theU.S. and other countries to contain and treat the disease. The extent to which theRussia /Ukraine crisis will impact our business and operations will also depend on future developments that are highly uncertain and cannot be predicted with confidence, including restrictive actions that have been and may be taken in the future by theU.S. and/or other countries, such as sanctions or export controls, and the duration of the conflict. 27 -------------------------------------------------------------------------------- Table of Contents Financings As ofMarch 31, 2022 , we had bank borrowings of$13.3 million , the terms of which range from 5 months to 12 months. The interest rates of our bank borrowings ranged from 3.80% to 6.00% per annum. As ofMarch 31, 2022 , we had convertible bonds of$73.1 million , with interest rates ranging from 0% to 4%. The convertible bonds are due as follows:$29.2 million in 2023;$29.2 million in 2024; and$14.7 million in 2026. As ofMarch 31, 2022 , we were in compliance with all material terms and covenants of our loan agreements, credit agreements, bonds and notes. OnJuly 23, 2021 , we received$708.4 million from the completion of the Business Combination,$705.1 million net of transaction costs paid byMicrovast, Inc. We used$87.9 million and$41.1 million of the net proceeds from the Business Combination to expand our manufacturing facilities and for the purchase of property and equipment associated with our existing manufacturing and R&D facilities, and$23.9 million and$18.3 million of the net proceeds were used for working capital during 2021 and first quarter of 2022, respectively. For the rest of 2022, we plan to spend an additional$260.0 million to$310.0 million on these capacity expansions at our facilities with the timing of payments being linked to various agreed milestones with our third-party contractors. We believe we will be able to meet our working capital requirements for at least the next 12 months and fund our expansion plans with proceeds from the Business Combination.
Capital expenditures and other contractual obligations
Our future capital requirements will depend on many factors, including, but not limited to, funding for planned production capacity expansion and general working capital. We believe the proceeds from the Business Combination will be sufficient to cover our planned expansions and our general working capital needs. In addition, we may in the future enter into arrangements to acquire or invest in complementary businesses or technologies. We may need to seek additional equity or debt financing in order to meet these future capital requirements. If we are unable to raise additional capital when desired, or on terms that are acceptable to us, our business, financial condition and results of operations could be adversely affected.
Lease Commitments
We lease certain facilities and equipment under non-cancellable lease agreements that expire at various dates through 2036. For additional information, see Note 12 - Leases, in the Notes to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Capital Expenditures
In 2021, we started our capacity expansion plans in Huzhou,China ,Berlin, Germany andClarksville, Tennessee . The project inGermany was completed in 2021, and the Huzhou,China andClarksville, Tennessee projects are expected to be completed in 2023. The completion of these projects is expected to increase our existing production capacity by 4 GWh once operational. We expect the total capital expenditures related to these capacity expansions in Huzhou,China andClarksville, Tennessee to be approximately$446.0 million , which we plan to finance primarily through the proceeds from the Business Combination, which we believe will be sufficient to cover all of the disclosed and estimated costs. Our planned capital expenditures are based on management's current estimates and may be subject to change. There can be no assurance that we will execute our capital expenditure plans as contemplated at or below-estimated costs, and we may also from time-to-time determine to undertake additional capital projects and incur additional capital expenditures. As a result, actual capital expenditures in future years may be more or less than the amounts shown.
There have not been any other material changes during the three-month period
ended
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Cash Flows
The following table provides a summary of our cash flow data for the periods
indicated:
Three Months Ended March 31,
2021 2022
Amount in thousands
Net cash used in operating activities (2,174) (24,914)
Net cash used in investing activities (25,429)
(41,060)
Net cash provided by financing activities 23,759
-
Cash Flows from Operating Activities
During the three months endedMarch 31, 2022 , our operating activities used$24.9 million in cash. This decrease in cash consisted of (1)$6.6 million in cash paid after adjusting our net loss for non-cash and non-operating items, of which$5.3 million is depreciation of property, plant and equipment and$0.4 million loss on change in fair value of warrant; (2)$18.3 million decrease in cash flows from operating assets and liabilities including$4.7 million cash outflow due to the net increase of accounts receivable and notes receivable.
Cash Flows from Investing Activities
During the three months endedMarch 31, 2022 , cash used in investing activities totaled$41.1 million . This cash outflow primarily consisted of capital expenditures related to purchase of property and equipment in connection with our expansion plans.
Cash Flows from Financing Activities
During the three months ended
Components of Results of Operations
Revenues
We derive revenue from the sales of our electric battery products, including
LpTO, LpCO, MpCo and HnCo battery power systems. While we have historically
marketed and sold our products primarily in the PRC, we have expanded and are
continuing to expand our sales presence internationally. The following table
sets forth a breakdown of our revenue by major geographic regions in which our
customers are located, for the periods indicated:
Three Months Ended March 31,
2021 2022
(In thousands) Amt % Amt %
China & Asia & Pacific Region $ 12,484 84 % $ 33,242 91 %
Europe 2,327 15 % 2,751 7 %
USA 127 1 % 675 2 %
Total $ 14,938 100 % $ 36,668 100 %
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We have historically derived a portion of our revenue in a given reporting
period from a limited number of key customers, which vary from period to period.
The following table summarizes net revenues from customers that accounted for
over 10% of our net revenues for the periods indicated:
Three Months Ended March 31,
2021 2022
A 24 % *%
B 11 % *%
C *% 14 %
D *% 13 %
*Revenue from such customers represented less than 10% of our revenue during the respective periods.
Cost of Revenues and Gross Profit
Cost of revenues include direct and indirect materials, manufacturing overhead (including depreciation, freight and logistics), warranty reserves and expenses, and labor costs and related personnel expenses, including share-based compensation and other related expenses that are directly attributable to the manufacturing of products.
Gross profit is equal to revenues less cost of revenues. Gross profit margin is equal to gross profit divided by revenues.
Operating Expenses
Operating expenses consist of selling and marketing, general and administrative and research and development expenses.
Selling and marketing expenses. Selling and marketing expenses consist primarily of personnel-related costs associated with our sales and marketing functions, including share-based compensation, and other expenses related to advertising and promotions of our products. We intend to hire additional sales personnel, initiate additional marketing programs and build additional relationships with our customers. Accordingly, we expect that our selling and marketing expenses will continue to increase in absolute dollars in the long term as we expand our business. General and administrative expenses. General and administrative expenses consist primarily of personnel-related expenses associated with our executive team members, including share-based compensation, legal, finance, human resource and information technology functions, as well as fees for professional services, depreciation and amortization and insurance expenses. We expect to incur additional costs as we hire personnel and enhance our infrastructure to support the anticipated growth of our business. Research and development expenses. Research and development expenses consist primarily of personnel-related expenses, including share-based compensation, raw material expenses relating to materials used for experiments, utility expenses and depreciation expenses attributable to research and development activities. Over time, we expect our research and development expense to increase in absolute dollars as we continue to make significant investments in developing new products, applications, functionality and other offerings.
Subsidy Income
Government subsidies represent government grants received from local government authorities. The amounts of and conditions attached to each subsidy were determined at the sole discretion of the relevant governmental authorities. Our subsidy income is non-recurring in nature.
Other Income and Expenses
Other income and expenses consist primarily of interest expense associated with
our debt financing arrangements, interest income earned on our cash balances,
gains and losses from foreign exchange conversion, and gains and losses on
disposal of assets.
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Income Tax Expense
We are subject to income taxes in theU.S. and foreign jurisdictions in which we do business, namely the PRC,Germany and theUnited Kingdom . These foreign jurisdictions have statutory tax rates different from those in theU.S. Accordingly, our effective tax rates will vary depending on the relative proportion of foreign toU.S. income, the absorption of foreign tax credits, changes in the valuation of our deferred tax assets and liabilities and changes in tax laws. We regularly assess the likelihood of adverse outcomes resulting from the examination of our tax returns by theU.S. Internal Revenue Service (the "IRS"), and other tax authorities to determine the adequacy of our income tax reserves and expense. Should actual events or results differ from our current expectations, charges or credits to our income tax expense may become necessary. Any such adjustments could have a significant impact on our results of operations. Income tax in the PRC is generally calculated at 25% of the estimated assessable profit of our subsidiaries in the PRC, except that two of our PRC subsidiaries were qualified as "High andNew Tech Enterprises " and thus enjoyed a preferential income tax rate of 15%. Federal corporate income tax rate of 21% is applied for ourU.S. entity. Income tax in theUnited Kingdom is calculated at an average tax rate of 19% of the estimated assessable profit of our subsidiary in theUnited Kingdom . German enterprise income tax, which is a combination of corporate income tax and trade tax, is calculated at 29.1% of the estimated assessable profit of our subsidiary inGermany .
Results of Operations
Comparison of the Three Months Ended
The following table sets forth our historical operating results for the periods
indicated:
Three Months Ended March 31, $ %
2021 2022 Change Change
Revenues 14,938 36,668 21,730 145.5 %
Cost of revenues (16,175) (36,655) (20,480) 126.6 %
Gross (loss)/profit (1,237) 13 1,250 (101.1) %
(8.3) % - %
Operating expenses:
General and administrative expenses (4,574) (26,101) (21,527) 470.6 %
Research and development expenses (3,786) (11,309) (7,523) 198.7 %
Selling and marketing expenses (3,156) (5,998) (2,842) 90.1 %
Total operating expenses (11,516) (43,408) (31,892) 276.9 %
Subsidy income 1,918 137 (1,781) (92.9) %
Operating loss (10,835) (43,258) (32,423) 299.2 %
Other income and expenses:
Interest income 96 314 218 227.1 %
Interest expense (1,846) (796) 1,050 (56.9) %
Other (expense)/income, net (5) 399 404 (8080.0) %
Loss on changes in fair value of convertible
notes (3,600) - 3,600 (100.0) %
Loss on change in fair value of warrant
liability - (435) (435) 100.0 %
Loss before income tax (16,190) (43,776) (27,586) 170.4 %
Income tax expense (109) - 109 (100.0) %
Net loss (16,299) (43,776) (27,477) 168.6 %
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Revenues
Our revenues increased from approximately$14.9 million for the three months endedMarch 31, 2021 to approximately$36.7 million for the same period in 2022, primarily driven by (i) an increase in sales volume from approximately 58.5 MWh for three months endedMarch 31, 2021 to approximately 113.9 MWh for the same period in 2022, (ii) an increase in average selling price due primarily to product mix and (iii) a higher mix of sales outside of the PRC, which generally have a higher average selling price per unit.
Cost of Revenues and Gross Profit
Our cost of revenues for the three months ended
Our gross margin increased from (8.3)% for the three months endedMarch 31, 2021 to 0.0% for the same period in 2022. The increase in gross margin was primarily due to the increase in the average selling price of our products for the three months endedMarch 31, 2022 and a result of better economies of scale resulting from increasing sales volume, offset by (i) the increases in material prices and (ii)$1.9 million of share-based compensation expenses we began recognizing based on modified vesting conditions after the Business Combination.
Operating Expenses
Selling and Marketing
Selling and marketing expenses for the three months endedMarch 31, 2022 increased$2.8 million , or 90.1%, compared to the same period in 2021. The increase in selling and marketing expenses was primarily due to$2.9 million of share-based compensation expenses we began recognizing based on modified vesting conditions after the Business Combination.
General and Administrative
General and Administrative expenses for the three months endedMarch 31, 2022 increased$21.5 million , or 470.6%, compared to the same period in 2021. The increase in General and Administrative expenses was primarily due to$18.1 million of share-based compensation expenses we began recognizing based on modified vesting conditions after the Business Combination and other increases of business expansion. Research and Development R&D expenses for the three months endedMarch 31, 2022 increased$7.5 million , or 198.7%, compared to the same period in 2021. The increase in R&D expenses was primarily due to$5.1 million of share-based compensation expenses we began recognizing based on modified vesting conditions after the Business Combination and other increases of business expansion.
Subsidy Income
Subsidy income decreased from$1.9 million for the three months endedMarch 31, 2021 to$0.1 million in the same period in 2022, primarily due to a one-time award granted by local governments in the PRC in 2021.
Loss on change in fair value of warrant liability
In the three months ended
Critical Accounting Policies and Estimates
Our unaudited condensed consolidated financial statements are prepared in accordance withU.S. GAAP. The preparation of these unaudited condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates. 32
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Table of Contents There have been no substantial changes to these estimates, or the policies related to them during the three months endedMarch 31, 2022 . For a full discussion of these estimates and policies, see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates" in Item 7 of our Annual Report on Form 10-K for the year endedDecember 31, 2021 .
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