UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For
the quarterly period ended
OR
For the transition period from to________________
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (Commission File Number) | (IRS Employer Identification No.) |
| (Address Of Principal Executive Offices) | (Zip Code) |
(Registrant’s telephone number, including area code)
Tuscan Holdings Corp. 135 E. 57th Street, 18th Floor New York, NY 10022 |
| (Former name, former address and former fiscal year, if changed since last report) |
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of exchange on which registered | ||
| Redeemable warrants, exercisable for shares of common stock at an exercise price of $11.50 per share | MVSTW | The Nasdaq Stock Market LLC |
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| ☒ | Smaller reporting company | ||
| Emerging growth company |
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
As
of November 12, 2021, there were
MICROVAST HOLDINGS, INC.
Form 10-Q
For the Quarter Ended September 30, 2021
Table of Contents
i
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements include, but are not limited to, statements about future financial and operating results, our objectives, expectations and intentions with respect to future operations, products and services; and other statements identified by words such as “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimated,” “believe,” “intend,” “plan,” “projection,” “outlook” or words of similar meaning. These forward-looking statements include, but are not limited to, statements regarding our industry and market sizes, future opportunities, our estimated future results and the Business Combination (as defined below). Such forward-looking statements are based upon the current beliefs and expectations of management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are difficult to predict and generally beyond our control. Actual results and the timing of events may differ materially from the results anticipated in these forward-looking statements.
There are important risks, uncertainties, events and factors that could cause our actual results or performance to differ materially from those in the forward-looking statements contained in this document, including:
| ● | risks of operations in the People’s Republic of China; |
| ● | a delay or failure to realize the expected benefits from the Business Combination; |
| ● | the risks related to disruption of management time from ongoing business operations due to the Business Combination; |
| ● | the impact of the ongoing COVID-19 pandemic; |
| ● | changes in the highly competitive market in which we compete, including with respect to our competitive landscape, technology evolution or regulatory changes; |
| ● | changes in the markets that we target; |
| ● | the risk that we may not be able to execute our growth strategies or achieve profitability; |
| ● | the risk that we are unable to secure or protect our intellectual property; |
| ● | the risk that our customers or third-party suppliers are unable to meet their obligations fully or in a timely manner; |
| ● | the risk that our customers will adjust, cancel or suspend their orders for our products; |
| ● | the risk that we will need to raise additional capital to execute our business plan, which may not be available on acceptable terms or at all; |
| ● | the risk of product liability or regulatory lawsuits or proceedings relating to our products or services; |
| ● | the risk that we may not be able to develop and maintain effective internal controls; |
| ● | the outcome of any legal proceedings that may be instituted against us or any of our directors or officers; and |
| ● | the failure to realize anticipated pro forma results and underlying assumptions. |
The foregoing list of factors is not exhaustive and new factors may emerge from time to time that could also affect actual performance and results. For more information, please see the risk factors included in our Annual Report on Form 10-K/A for the year ended December 31, 2020 in Part I, Item 1A and in the Registration Statement on Form S-1, (File No. 333-258978), which was initially filed on August 20, 2021, and as further amended, and subsequent filings with the SEC.
Actual results, performance or achievements may differ materially, and potentially adversely, from any projections and forward-looking statements and the assumptions on which those forward-looking statements are based. There can be no assurance that the data contained herein is reflective of future performance to any degree. You are cautioned not to place undue reliance on forward-looking statements as a predictor of future performance as projected financial information and other information are based on estimates and assumptions that are inherently subject to various significant risks, uncertainties and other factors, many of which are beyond our control.
All information set forth herein speaks only as of the date hereof, and we disclaim any intention or obligation to update any forward-looking statements as a result of developments occurring after the date hereof except as may be required under applicable securities laws. Forecasts and estimates regarding our industry and end markets are based on sources we believe to be reliable, however there can be no assurance these forecasts and estimates will prove accurate in whole or in part. Annualized, pro forma, projected and estimated numbers are used for illustrative purpose only, are not forecasts and may not reflect actual results.
ii
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
MICROVAST HOLDINGS, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands of U.S. dollars, except share and per share data, or as otherwise noted)
| December 31, 2020 | September 30, 2021 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted cash | ||||||||
| Accounts receivable (net of allowance for doubtful accounts of $ | ||||||||
| Notes receivable | ||||||||
| Inventories, net | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Amount due from related parties | ||||||||
| Total Current Assets | ||||||||
| Property, plant and equipment, net | ||||||||
| Land use rights, net | ||||||||
| Acquired intangible assets, net | ||||||||
| Other non-current assets | ||||||||
| Total Assets | $ | $ | ||||||
| Liabilities | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Advance from customers | ||||||||
| Accrued expenses and other current liabilities | ||||||||
| Income tax payables | ||||||||
| Short-term bank borrowings | ||||||||
| Notes payable | ||||||||
| Bonds payable | ||||||||
| Total Current Liabilities | ||||||||
| Deposit liability for series B2 convertible preferred shares (“Series B2 Preferred”) | ||||||||
| Long-term bonds payable | ||||||||
| Warrant liability | ||||||||
| Share-based compensation liability | ||||||||
| Other non-current liabilities | ||||||||
| Total Liabilities | $ | $ | ||||||
1
MICROVAST HOLDINGS, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS - continued
(In thousands of U.S. dollars, except share and per share data, or as otherwise noted)
| December 31, 2020 | September 30, 2021 | |||||||
| Mezzanine Equity (Note 14 and Note 16) | ||||||||
| Series C1 convertible redeemable preferred shares (“Series C1 Preferred”) (US$ | $ | $ | ||||||
| Series C2 convertible redeemable preferred shares (“Series C2 Preferred”) (US$ | ||||||||
| Series D1 convertible redeemable preferred shares (“Series D1 Preferred”) (US$ | ||||||||
| Redeemable noncontrolling interests | ||||||||
| Total Mezzanine Equity | $ | $ | ||||||
| Commitments and contingencies (Note 21) | ||||||||
| Shareholders’ Equity | ||||||||
| Common Stock (par value of US$ | $ | $ | ||||||
| Additional paid-in capital | ||||||||
| Statutory reserves | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Accumulated other comprehensive income | ||||||||
| Total Shareholders’ (Deficit)/Equity | ( | ) | ||||||
| Total Liabilities, Mezzanine Equity and Shareholders’ Equity | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
2
MICROVAST HOLDINGS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands of U.S. dollars, except share and per share data, or as otherwise noted)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2020 | 2021 | 2020 | 2021 | |||||||||||||
| Revenues | $ | $ | $ | $ | ||||||||||||
| Cost of revenues | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Gross profit/(loss) | ( | ) | ( | ) | ||||||||||||
| Operating expenses: | ||||||||||||||||
| General and administrative expenses | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Research and development expenses | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Selling and marketing expenses | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total operating expenses | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Subsidy income | ( | ) | ||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income and expenses: | ||||||||||||||||
| Interest income | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Loss on changes in fair value of convertible notes | ( | ) | ( | ) | ||||||||||||
| Gain on change in fair value of warrant liability | ||||||||||||||||
| Other income (expense), net | ( | ) | ||||||||||||||
| Loss before provision for income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income tax benefit (expense) | ( | ) | ( | ) | ( | ) | ||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Less: Accretion of Series C1 Preferred | ||||||||||||||||
| Less: Accretion of Series C2 Preferred | ||||||||||||||||
| Less: Accretion of Series D1 Preferred | ||||||||||||||||
| Less: Accretion for noncontrolling interests | ||||||||||||||||
| Net loss attributable to common stock shareholders of Microvast Holdings, Inc. | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net loss per share attributable to common stock shareholders of Microvast Holdings, Inc. | ||||||||||||||||
| Basic and diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted average shares used in calculating net loss per share of common stock | ||||||||||||||||
| Basic and diluted | ||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
MICROVAST HOLDINGS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands of U.S. dollars, except share and per share data, or as otherwise noted)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2020 | 2021 | 2020 | 2021 | |||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Foreign currency translation adjustment | ( | ) | ( | ) | ||||||||||||
| Comprehensive income/(loss) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
MICROVAST HOLDINGS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ (DEFICIT)/EQUITY
(In thousands of U.S. dollars, except share and per share data, or as otherwise noted)
| Three Months Ended September 30, 2020 | ||||||||||||||||||||||||||||
| Additional | Accumulated other |
Total Microvast Holdings, Inc. |
||||||||||||||||||||||||||
| Common Stock | paid-in | Accumulated | Comprehensive | Statutory | Shareholders’ | |||||||||||||||||||||||
| Shares | Amount | capital | deficit | loss | reserves | Deficit | ||||||||||||||||||||||
| Balance as of June 30, 2020 | $ | |
$ | $ | ( |
) | $ | ( |
) | $ | $ | ( |
) | |||||||||||||||
| Net loss | - | ( |
) | ( |
) | |||||||||||||||||||||||
| Accretion for Series C1 Preferred | - | ( |
) | ( |
) | |||||||||||||||||||||||
| Accretion for Series C2 Preferred | - | ( |
) | ( |
) | |||||||||||||||||||||||
| Accretion for Series D1 Preferred | - | ( |
) | ( |
) | |||||||||||||||||||||||
| Accretion for the exiting noncontrolling interests | - | ( |
) | ( |
) | |||||||||||||||||||||||
| Foreign currency translation adjustments | - | |||||||||||||||||||||||||||
| Accretion for redeemable noncontrolling interests | - | ( |
) | ( |
) | |||||||||||||||||||||||
| Balance as of September 30, 2020 | $ | $ | $ | ( |
) | $ | ( |
) | $ | $ | ( |
) | ||||||||||||||||
| Nine Months Ended September 30, 2020 | ||||||||||||||||||||||||||||
| Additional | Accumulated other |
Total Microvast Holdings, Inc. |
||||||||||||||||||||||||||
| Common Stock | paid-in | Accumulated | Comprehensive | Statutory | Shareholders’ | |||||||||||||||||||||||
| Shares | Amount | capital | deficit | loss | reserves | Deficit | ||||||||||||||||||||||
| Balance as of January 1, 2020 | $ | |
$ | $ | ( |
) | $ | ( |
) | $ | $ | ( |
) | |||||||||||||||
| Net loss | - | ( |
) | ( |
) | |||||||||||||||||||||||
| Accretion for Series C1 Preferred | - | ( |
) | ( |
) | |||||||||||||||||||||||
| Accretion for Series C2 Preferred | - | ( |
) | ( |
) | ( |
) | |||||||||||||||||||||
| Accretion for Series D1 Preferred | - | ( |
) | ( |
) | |||||||||||||||||||||||
| Accretion for the exiting noncontrolling interests | - | ( |
) | ( |
) | |||||||||||||||||||||||
| Foreign currency translation adjustments | - | |||||||||||||||||||||||||||
| Accretion for redeemable noncontrolling interests | - | ( |
( |
) | ||||||||||||||||||||||||
| Balance as of September 30, 2020 | $ | $ | $ | ( |
) | $ | ( |
) | $ | $ | ( |
) | ||||||||||||||||
5
MICROVAST HOLDINGS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ (DEFICIT)/EQUITY - continued
(In thousands of U.S. dollars, except share and per share data, or as otherwise noted)
| Three Months Ended September 30, 2021 | ||||||||||||||||||||||||||||
| Additional | Accumulated other | Total Microvast |
||||||||||||||||||||||||||
| Common Stock | paid-in | Accumulated | Comprehensive | Statutory | Shareholders’ | |||||||||||||||||||||||
| Shares | Amount | capital | deficit | Income (loss) | reserves | (Deficit)/Equity | ||||||||||||||||||||||
| Balance as of June 30, 2021 | $ | $ | $ | ( |
) | $ | $ | $ | ( |
) | ||||||||||||||||||
| Net loss | - | ( |
) | ( |
) | |||||||||||||||||||||||
| Accretion for Series C1 Preferred | - | ( |
) | ( |
) | |||||||||||||||||||||||
| Accretion for Series C2 Preferred | - | ( |
) | ( |
) | |||||||||||||||||||||||
| Accretion for Series D1 Preferred | - | ( |
) | ( |
) | |||||||||||||||||||||||
| Accretion for redeemable noncontrolling interests | - | ( |
) | ( |
) | |||||||||||||||||||||||
| Accretion for the exiting noncontrolling interests | - | ( |
) | ( |
) | |||||||||||||||||||||||
| Issuance of common stock upon the reverse recapitalization, net of issuance costs of $ |
||||||||||||||||||||||||||||
| Share-based compensation | ||||||||||||||||||||||||||||
| Foreign currency translation adjustments | - | ( |
) | ( |
) | |||||||||||||||||||||||
| Balance as of September 30, 2021 | $ | $ | $ | ( |
) | $ | $ | $ | ||||||||||||||||||||
| Nine Months Ended September 30, 2021 | ||||||||||||||||||||||||||||
| Additional | Accumulated other | Total Microvast |
||||||||||||||||||||||||||
| Common Stock | paid-in | Accumulated | Comprehensive | Statutory | Shareholders’ | |||||||||||||||||||||||
| Shares | Amount | capital | deficit | income (loss) | reserves | (Deficit)/Equity | ||||||||||||||||||||||
| Balance as of January 1, 2021 | $ | $ | $ | ( |
) | $ | $ | $ | ( |
) | ||||||||||||||||||
| Net loss | - | ( |
) | ( |
) | |||||||||||||||||||||||
| Accretion for Series C1 Preferred | - | ( |
) | ( |
) | |||||||||||||||||||||||
| Accretion for Series C2 Preferred | - | ( |
) | ( |
) | |||||||||||||||||||||||
| Accretion for Series D1 Preferred | - | ( |
) | ( |
) | |||||||||||||||||||||||
| Accretion for redeemable noncontrolling interests | - | ( |
) | ( |
) | |||||||||||||||||||||||
| Accretion for the exiting noncontrolling interests | - | ( |
) | ( |
) | |||||||||||||||||||||||
| Issuance of common stock upon the reverse recapitalization, net of issuance costs of $ |
||||||||||||||||||||||||||||
| Share-based compensation | ||||||||||||||||||||||||||||
| Foreign currency translation adjustments | - | ( |
) | ( |
) | |||||||||||||||||||||||
| Balance as of September 30, 2021 | $ | $ | $ | ( |
) | $ | $ | $ | ||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
6
MICROVAST HOLDINGS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of U.S. dollars, except share and per share data, or as otherwise noted)
| Nine Months Ended September 30, | ||||||||
| 2020 | 2021 | |||||||
| Cash flows from operating activities | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Loss on disposal of property, plant and equipment | ||||||||
| Depreciation of property, plant and equipment | ||||||||
| Amortization of land use right and intangible assets | ||||||||
| Share-based compensation | ||||||||
| Changes in fair value of warrant liability | ( | ) | ||||||
| Changes in fair value of convertible notes | ||||||||
| (Reversal) allowance of doubtful accounts | ( | ) | ||||||
| Provision for obsolete inventories | ||||||||
| Impairment loss from property, plant and equipment | ||||||||
| Product warranty | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Notes receivable | ||||||||
| Accounts receivable | ||||||||
| Inventories | ( | ) | ||||||
| Prepaid expenses and other current assets | ( | ) | ( | ) | ||||
| Amount due from/to related parties | ( | ) | ||||||
| Other non-current assets | ( | ) | ||||||
| Notes payable | ( | ) | ||||||
| Accounts payable | ( | ) | ( | ) | ||||
| Advance from customers | ( | ) | ( | ) | ||||
| Accrued expenses and other liabilities | ( | ) | ||||||
| Other non-current liabilities | ||||||||
| Income tax payables | ||||||||
| Net cash generated from/(used in) operating activities | ( | ) | ||||||
| Cash flows from investing activities | ||||||||
| Purchases of property, plant and equipment | ( | ) | ( | ) | ||||
| Proceeds on disposal of property, plant and equipment | ||||||||
| Purchase of short-term investments | ( | ) | ||||||
| Proceeds from maturity of short-term investments | ||||||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities | ||||||||
| Proceeds from borrowings | ||||||||
| Repayment of bank borrowings | ( | ) | ( | ) | ||||
| Loans borrowing from related parties | ||||||||
| Repayment of related party loans | ( | ) | ( | ) | ||||
| Merger and Private Investment in Public Equity (“PIPE”) financing | ||||||||
| Payment for transaction fee in connection with the merger | ( | ) | ||||||
| Payment to exited noncontrolling interests (Note 14) | ( | ) | ||||||
| Issuance of convertible notes | ||||||||
| Net cash (used in)/generated from financing activities | ( | ) | ||||||
| Effect of exchange rate changes | ||||||||
| (Decrease) Increase in cash, cash equivalents and restricted cash | ( | ) | ||||||
| Cash, cash equivalents and restricted cash at beginning of the period | ||||||||
| Cash, cash equivalents and restricted cash at end of the period | $ | $ | ||||||
7
MICROVAST HOLDINGS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - continued
(In thousands of U.S. dollars, except share and per share data, or as otherwise noted)
| Nine
Months Ended September 30, | ||||||||
| 2020 | 2021 | |||||||
| Reconciliation to amounts on consolidated balance sheets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted cash | ||||||||
| Total cash, cash equivalents and restricted cash | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
8
MICROVAST HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(In thousands of U.S. dollars, except share and per share data, or as otherwise noted)
1. DESCRIPTION OF ORGANIZATION AND BUSINESS OPERATIONS
Microvast Holdings, Inc.(“Microvast” or the “Company”) and its subsidiaries (collectively, the “Group”) are primarily engaged in developing, manufacturing, and selling electronic power products for electric vehicles primarily in the People’s Republic of China (“PRC”) and Europe.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation and use of estimates
The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries. The unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Security and Exchange Commission and U.S. generally accepted accounting standards (“U.S. GAAP”) for interim financial reporting. Accordingly, certain information and disclosures normally included in the notes to the annual financial statements prepared in accordance with U.S. GAAP have been omitted from these interim financial statements.
The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the period ended December 31, 2020 included in the Company’s Current Report on Form 8-K filed with the SEC on July 28, 2021 and as amended and filed with the SEC on August 16, 2021, which provides a more complete discussion of the Company’s accounting policies and certain other information. In the opinion of the management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (which include normal recurring adjustments) necessary for a fair statement of financial results for the interim periods presented. The Company believes that the disclosures are adequate to make the information presented not misleading.
The results of operations for the three and nine months ended September 30, 2021 are not necessarily indicative of the results to be expected for any subsequent quarter or for the fiscal year ending December 31, 2021.
The financial information as of December 31, 2020 included on the condensed consolidated balance sheets is derived from the Group’s audited consolidated financial statements for the year ended December 31, 2020.
Other than the policies noted below, there have been no significant changes to the significant accounting policies disclosed in Note 2 of the audited consolidated financial statements as of December 31, 2020 and 2019 and for the years ended December 31, 2020, 2019, and 2018.
Significant accounting estimates reflected in the Group’s financial statements include allowance for doubtful accounts, provision for obsolete inventories, impairment of long-lived assets, valuation allowance for deferred tax assets, product warranties, fair value measurement of the convertible promissory notes, fair value measurement of warrant liability and share based compensation.
All intercompany transactions and balances have been eliminated upon consolidation.
9
MICROVAST HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(In thousands of U.S. dollars, except share and per share data, or as otherwise noted)
2. SIGNIFICANT ACCOUNTING POLICIES - continued
Basis of presentation and use of estimates-continued
On July 23, 2021 (the “Closing Date”), Tuscan Holdings Corp. (“Tuscan”), consummated the previously announced merger with Microvast, Inc., a Delaware corporation, pursuant to the Agreement and Plan of Merger (the “Merger Agreement”) dated February 1, 2021, between Tuscan, Microvast, Inc. and TSCN Merger Sub Inc., a Delaware corporation (“Merger Sub”), pursuant to which the Merger Sub merged with and into Microvast, Inc., with Microvast, Inc. surviving the merger (the “Merger,” and, collectively with the other transactions described in the Merger Agreement, the “Reverse Recapitalization”). As a result of the Merger, Tuscan was renamed “Microvast Holdings, Inc.” The Merger is accounted for as a reverse recapitalization as Microvast, Inc. was determined to be the accounting acquirer under Financial Accounting Standards Board’s Accounting Standards Codification Topic 805, Business Combinations (“ASC 805”).
Please refer to Note 3 “Reverse Recapitalization” for further details of the Merger.
Emerging Growth Company
Pursuant to the JOBS Act, an emerging growth company may adopt new or revised accounting standards that may be issued by FASB or the SEC either (i) within the same periods as those otherwise applicable to non-emerging growth companies or (ii) within the same time periods as private companies. The Company intends to take advantage of the exemption for complying with new or revised accounting standards within the same time periods as private companies. Accordingly, the information contained herein may be different than the information provided by other public companies.
The Company also intends to take advantage of some of the reduced regulatory and reporting requirements of emerging growth companies pursuant to the JOBS Act so long as the Company qualifies as an emerging growth company, including, but not limited to, an exemption from the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation, and exemptions from the requirements of holding non-binding advisory votes on executive compensation and golden parachute payments.
Revenue recognition
Nature of Goods and Services
The Group’s revenue consists primarily of sales of lithium batteries. The obligation of the Group is providing the electronic power products. Revenue is recognized at the point of time when control of the promised goods or services is transferred to the customer, in an amount that reflects the consideration the Group expects to be entitled to in exchange for the goods or services.
10
MICROVAST HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(In thousands of U.S. dollars, except share and per share data, or as otherwise noted)
2. SIGNIFICANT ACCOUNTING POLICIES - continued
Disaggregation of revenue
For
the three months ended September 30, 2020 and 2021, the Group derived revenues of $
For
the nine months ended September 30, 2020 and 2021, the Group derived revenues of $
Contract balances
Contract
balances include accounts receivable and advances from customers. Accounts receivable represent cash not received from customers and
are recorded when the rights to consideration is unconditional. The allowance for doubtful accounts reflects the best estimate of probable
losses inherent to the accounts receivable balance. Contract liabilities, recorded in advance from customers in the consolidated balance
sheet, represent payment received in advance or payment received related to a material right provided to a customer to acquire additional
goods or services at a discount in a future period. During the three months ended September 30, 2020 and 2021, the Group recognized $
Share-based compensation
Share-based payment transactions with employees are measured based on the grant date fair value of the equity instrument and recognized as compensation expense on a straight-line basis over the requisite service period, with a corresponding impact reflected in additional paid-in capital. For share-based awards granted with performance condition, the compensation cost is recognized when it is probable that the performance condition will be achieved. The Company reassesses the probability of achieving the performance condition at the end of each reporting date and records a cumulative catch-up adjustment for any changes to its assessment. For performance-based awards with a market condition, such as awards based on total shareholder return (“TSR”), compensation expense is recognized on a straight-line basis over the estimated service period of the award, regardless of whether the market condition is satisfied. Forfeitures are recognized as they occur. Liability-classified awards are remeasured at their fair-value-based measurement as of each reporting date until settlement.
11
MICROVAST HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(In thousands of U.S. dollars, except share and per share data, or as otherwise noted)
2. SIGNIFICANT ACCOUNTING POLICIES - continued
Warrant Liability
The Company accounts for warrants in accordance with the guidance contained in ASC 815-40 under which the warrants do not meet the criteria for equity treatment and must be recorded as liabilities. As the Private Warrants (as defined below) meet the definition of a derivative as contemplated in ASC 815, the Company classifies the Private Warrants as liabilities. This liability is subject to re-measurement at each balance sheet date until exercised, and any change in fair value is recognized in the condensed statements of operations. The Private Warrants are valued using a Monte Carlo simulation model on the basis of the quoted market price of Public Warrants.
3. REVERSE RECAPITALIZATION
On July 23, 2021, Tuscan merged with Microvast,
Inc., with Microvast, Inc. surviving the merger. As a result of the Merger, Tuscan was renamed “Microvast Holdings, Inc.”
On the Closing Date, pursuant to the terms of the Merger Agreement, the Framework Agreement1
and subscription agreements entered into with the holders of an aggregate of $
| ● | The Company issued | |
| ● | The Company issued | |
| ● | The Company issued | |
| ● | The Company issued |
Pursuant to the Merger Agreement, the former owners
of Microvast (“Microvast Holders”) and the MPS minority investors will have the ability to earn, in the aggregate, an additional
Each of the options to purchase Microvast, Inc.’s common stock that was outstanding before the Merger was converted into options to acquire Common Stock by computing the number of shares and converting the exercise price based on the exchange ratio of 160.3 (the “Common Exchange Ratio”). Refer to Note 17.
| 1 | In connection with the Merger Agreement, Tuscan, Microvast Power
System (Huzhou) Co., Ltd., a majority owned subsidiary of Microvast, Inc. (“MPS”), certain MPS convertible loan investors
(the “CL Investors”, refer to Note 11), some MPS minority investors, and certain other parties entered into a framework agreement
(the “Framework Agreement”), pursuant to which, |
12
MICROVAST HOLDINGS, INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(In thousands of U.S. dollars, except share and per share data, or as otherwise noted)
3. REVERSE RECAPITALIZATION - continued
Each capped non-vested share unit of Microvast, Inc. that was outstanding before the Merger was converted into a non-vested share unit of the Company by computing the number of shares and converting the capped price based on the Common Exchange Ratio. Refer to Note 17.
As of the Closing Date and following the completion of the Merger, the ownership interests of the Company’s stockholders were as follows:
| Shares | ||||
| Existing Microvast Equity Holders(a) | ||||
| Existing Microvast Convertible Noteholders | ||||
| Tuscan public stockholders | ||||
| Sponsor Group(b)(c) | ||||
| EarlyBirdCapital | ||||
| PIPE investors immediately after Merger | ||||
| Common Stock | ||||
| (a) | Excludes the Earn-Out Shares, but is inclusive of the shares being issued pursuant to the Framework Agreement to the CL Investors and MPS minority investors. |
| (b) | The Sponsor Group includes Common Stock owned by the Sponsor, Stefan M. Selig, Richard O. Rieger and Amy Butte. |
| (c) | Includes |
The Merger is accounted for as a reverse recapitalization under U.S. GAAP. This determination is primarily based on (1) Microvast, Inc.’s stockholders comprising a relative majority of the voting power of the Company and having the ability to nominate the members of the Board, (2) Microvast, Inc.’s operations prior to the acquisition comprising the only ongoing operations of the Company, and (3) Microvast, Inc.’s senior management comprising a majority of the senior management of the Company. Under this method of accounting, Tuscan is treated as the “acquired” company for financial reporting purposes. Accordingly, the financial statements of the Company represent a continuation of the financial statements of Microvast, Inc. with the Merger being treated as the equivalent of Microvast, Inc. issuing stock for the net assets of Tuscan, accompanied by a recapitalization. The net assets of Tuscan are stated at historical costs, with no goodwill or other intangible assets recorded and are consolidated with Microvast Inc.’s financial statements on the Closing Date. Operations prior to the Merger are presented as those of Microvast, Inc. The shares and net loss per share available to holders of the Company’s Common Stock, prior to the Merger, have been retroactively restated as shares reflecting the Common Exchange Ratio established in the Merger Agreement.
In connection with the Merger, the Company raised
approximately $
In connection with
the Merger, the Sponsor and related parties entered into the amended escrow agreement, pursuant to which
13
MICROVAST HOLDINGS, INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(In thousands of U.S. dollars, except share and per share data, or as otherwise noted)
4. ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following:
| December 31,
2020 | September 30,
2021 | |||||||
| Accounts receivable | $ | $ | ||||||
| Allowance for doubtful accounts | ( | ) | ( | ) | ||||
| Accounts receivable, net | $ | $ | ||||||
Movement of allowance for doubtful accounts was as follows:
| Three
Months Ended September 30, | Nine
Months Ended September 30, | |||||||||||||||
| 2020 | 2021 | 2020 | 2021 | |||||||||||||
| Balance at beginning of the period | $ | $ | $ | $ | ||||||||||||
| Charge to expenses | ( | ) | ||||||||||||||
| Write off | ( | ) | ( | ) | ||||||||||||
| Exchange difference | ||||||||||||||||
| Balance at end of the period | $ | $ | $ | $ | ||||||||||||
5. INVENTORIES, NET
Inventories consisted of the following:
| December 31,
2020 | September 30,
2021 | |||||||
| Work in process | $ | $ | ||||||
| Raw materials | ||||||||
| Finished goods | ||||||||
| Total | $ | $ | ||||||
Provision
for obsolete inventories at $
14
MICROVAST HOLDINGS, INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(In thousands of U.S. dollars, except share and per share data, or as otherwise noted)
6. PREPAID EXPENSES AND OTHER CURRENT ASSETS
| December 31,
2020 | September 30,
2021 | |||||||
| Advances to suppliers | $ | $ | ||||||
| Other receivables | ||||||||
| VAT receivables | ||||||||
| Deposits | ||||||||
| Total | $ | $ | ||||||
The balance of the VAT receivables represented the amount available for future deduction against VAT payable.
7. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
| December 31,
2020 | September 30,
2021 | |||||||
| Payables to exiting investors | $ | $ | ||||||
| Payables for purchase of property, plant and equipment | ||||||||
| Product warranty | ||||||||
| Other current liabilities | ||||||||
| Accrued payroll and welfare | ||||||||
| Interest payable | ||||||||
| Accrued expenses | ||||||||
| Other tax payable | ||||||||
| Total | $ | $ | ||||||
The payables to exiting investors represents the amount due in a year for the redemption of the shares owned by certain noncontrolling shareholders of a subsidiary. See Note 14.
8. PRODUCT WARRANTY
Movement of product warranty was as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2020 | 2021 | 2020 | 2021 | |||||||||||||
| Balance at beginning of the period | $ | $ | $ | $ | ||||||||||||
| Provided for new sales during the period | ||||||||||||||||
| Provided for pre-existing legacy product | ||||||||||||||||
| Utilized during the period | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Balance at end of the period | $ | $ | $ | $ | ||||||||||||
Warranty provisions are based upon
historical experience. Changes in provisions related to pre-existing legacy products were made based on actual claims and intensive
testing and analysis on the legacy products. In 2021, as a result of the increases in the repairing cost and frequency of claims
with respect to a legacy product sold in 2017 and 2018, the Company conducted intensive experiments and a root cause analysis, which
was completed in October 2021. The Company concluded that a component purchased from a supplier was not meeting the Company’s
performance standards. As a result, the Company expects that the impacted legacy products sold will need to be replaced before the
expiration of the warranty term. This reassessment resulted in a change in estimate for additional accrual of $
15
MICROVAST HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(In thousands of U.S. dollars, except share and per share data, or as otherwise noted)
8. PRODUCT WARRANTY - continued
| December 31,
2020 | September 30,
2021 | |||||||
| Product warranty – current | $ | $ | ||||||
| Product warranty – non-current | ||||||||
| Total | $ | $ | ||||||
9. BANK BORROWINGS
The Group entered into loan agreements and bank facilities with Chinese banks and a German bank.
The
bank facility agreement with
Changes in bank borrowings are as follows:
| Three
Months Ended September 30, | Nine
Months Ended September 30, | |||||||||||||||
| 2020 | 2021 | 2020 | 2021 | |||||||||||||
| Beginning balance | $ | $ | $ | $ | ||||||||||||
| Proceeds from bank borrowings | ||||||||||||||||
| Repayments of principal | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Exchange difference | ( | ) | ( | ) | ||||||||||||
| Ending balance | $ | $ | $ | $ | ||||||||||||
All balance of bank borrowings as of September 30, 2021 and December 31, 2020 are current borrowings.
16
MICROVAST HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(In thousands of U.S. dollars, except share and per share data, or as otherwise noted)
9. BANK BORROWINGS - continued
Certain assets of the Group had been pledged to secure the above banking facilities granted to the Group. The aggregate carrying amount of the assets pledged by the Group as of December 31, 2020 and September 30, 2021 are as follows:
| December 31,
2020 | September 30,
2021 | |||||||
| Buildings | $ | $ | ||||||
| Machinery and equipment | ||||||||
| Land use rights | ||||||||
| Total | $ | $ | ||||||
In
addition, the Group’s related parties Ochem Chemical Co., Ltd (“Ochem”) and Ochemate Material Technologies Co., Ltd
(“Ochemate”) provided $
10. OTHER NON-CURRENT LIABILITIES
| December 31,
2020 | September 30,
2021 | |||||||
| Payable to exiting investors | $ | $ | ||||||
| Product warranty - non-current | ||||||||
| Deferred subsidy income- non-current | ||||||||
| Total | $ | $ | ||||||
The payable to exiting investors represents the amount to be paid for the redemption of the shares owned by certain noncontrolling interest holders of a subsidiary. See Note 14. The balance was paid out as of September 30, 2021.
11. BONDS PAYABLE
| December 31, 2020 | September 30, 2021 | |||||||
| Bonds payable | ||||||||
| Third-party investors | $ | $ | ||||||
| Total | $ | $ | ||||||
| Long–term bonds payable | ||||||||
| Huzhou Saiyuan | $ | $ | ||||||
| Total | $ | $ | ||||||
17
MICROVAST HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(In thousands of U.S. dollars, except share and per share data, or as otherwise noted)
11. BONDS PAYABLE - continued
Convertible Bonds issued to Huzhou Saiyuan
On
December 29, 2018, MPS signed an agreement with Huzhou Saiyuan, an entity established
by the local government, to issue convertible bonds to Huzhou Saiyuan for a total consideration of $
If the subscribed bonds are not repaid by the maturity date, Huzhou Saiyuan has the right to dispose of the equity interests pledged by the Company in proportion to the amount of matured bonds, or convert the bond to the equity interests of MPS within 60 days after the maturity date. If Huzhou Saiyuan decides to convert the bonds to equity interests of MPS, the equity interests pledged would be released and the convertible bonds should be converted to the equity interest of MPS based on the entity value of MPS at $950,000.
On September 28, 2020, MPS signed a supplemental agreement for extension on repayment of convertible bonds to Huzhou Saiyuan, and the terms on repayments and interests are as follows:
| Issuance Date | Subscribed Amount | Maturity Date | Repayment Amount | Annual Interest Rate | ||||
| $ | $ | |||||||
| $ | $ | |||||||
| $ | ||||||||
| $ | ||||||||
| $ | $ |
An
additional one-year extension could be granted to the Group if the Group submits a written application before the extended maturity date.
As of September 30, 2021, the outstanding balance of the convertible bonds to Huzhou Saiyuan totaled at $
Convertible Bonds issued to third-party investors
On November 2, 2018, MPS signed a convertible
bond agreement with two third-party investors (the “CL Investors”), through which the CL Investors agreed to provide a non-interest
bearing loan in an aggregate amount of $
On July 23, 2021, upon the completion of the Merger
between Microvast, Inc. and Tuscan, the convertible bonds were settled and converted into
Convertible Notes at Fair Value (the “Bridge Notes”)
On
January 4, 2021, the Company entered into a note purchase agreement to issue $
18
MICROVAST
HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(In thousands of U.S. dollars, except share and per share data, or as otherwise noted)
11. BONDS PAYABLE - continued
The
fair value option was elected for the measurement of the convertible notes. Changes in fair value, a loss of $
On
July 23, 2021, upon the completion of the Merger between Microvast, Inc. and Tuscan, the convertible promissory notes were converted
into
12. WARRANTS
The Company assumed
The Public Warrants became exercisable 30 days
after the completion of the Merger. No Warrants will be exercisable for cash unless the Company registered Common Stock issuable upon
exercise of the Warrants with the SEC. Since the registration of shares was not completed within 90 days following the Merger, warrant
holders may exercise Warrants on a net-share settlement basis. The Public Warrants will expire
Once the Public Warrants became exercisable, the Company may redeem the Public Warrants:
| ● | in whole and not in part; |
| ● | at a price of $0.01 per warrant; |
| ● | upon not less than 30 days’ prior written notice of redemption; |
| ● | if, and only if, the reported last sale price of the Company’s Common Stock equals or exceeds $18.00 per share for any 20 trading days within a 30-trading day period ending on the third business day prior to the notice of redemption to the warrant holders; and |
| ● | if, and only if, there is a current registration statement in effect with respect to the shares of Common Stock underlying the warrants. |
If the Company calls the Public Warrants for redemption, management will have the option to require all holders that wish to exercise the Public Warrants to do so on a net-share settlement basis.
The Private Warrants are identical to the Public
Warrants, except that the Private Warrants will be exercisable for cash or on a net-share settlement basis, at the holder’s option,
and be non-redeemable so long as they are held by the initial purchasers or their permitted transferees. If the Private Warrants are held
by someone other than the initial purchasers or their permitted transferees, the Private Warrants will be redeemable by the Company and
exercisable by such holders on the same basis as the Public Warrants. In addition, so long as the Private Warrants are held by EarlyBirdCapital
and its designee, the Private Warrants will expire
The exercise price and number of shares of Common Stock issuable upon exercise of the Warrants may be adjusted in certain circumstances including in the event of a stock dividend, or recapitalization, reorganization, merger or consolidation. However, the Warrants will not be adjusted for issuance of Common Stock at a price below its exercise price. Additionally, in no event will the Company be required to net cash settle the Warrants.
19
MICROVAST HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(In thousands of U.S. dollars, except share and per share data, or as otherwise noted)
12. WARRANTS - continued
The
Private Warrants were initially recognized as a liability on July 23, 2021 at a fair value of $
The Private Warrants were valued using the following assumptions under the Monte Carlo Model that assumes optimal exercise of the Company’s redemption option at the earliest possible date:
| July 23, 2021 | September 30, 2021 | |||||||
| Market price of public stock | $ | $ | ||||||
| Exercise price | $ | $ | ||||||
| Expected term (years) | ||||||||
| Volatility | % | % | ||||||
| Risk-free interest rate | % | % | ||||||
| Dividend rate | % | % | ||||||
The market price of public stock is the quoted market price of the Company’s Common Stock as of the valuation date. The exercise price is extracted from the warrant agreements. The expected term is derived from the exercisable years based on the warrant agreements. The expected volatility is a blend of implied volatility from the Company’s own public warrant pricing and the average volatility of peer companies. The risk-free interest rate was estimated based on the market yield of US Government Bond with maturity close to the expected term of the warrants. The dividend yield was estimated by the Company based on its expected dividend policy over the expected term of the warrants.
13. FAIR VALUE MEASUREMENT
Measured or disclosed at fair value on a recurring basis
The Group measured its financial assets and liabilities, including cash and cash equivalents, restricted cash, warrants and convertible notes at fair value on a recurring basis as of December 31, 2020 and September 30, 2021. Cash and cash equivalents, restricted cash and convertible notes are classified within Level 1 of the fair value hierarchy because they are valued based on the quoted market price in an active market. The fair value of the warrant liability is based on significant unobservable inputs, which represent Level 3 measurements within the fair value hierarchy. In determining the fair value of the warrant liability, the Company used the Monte Carlo that assumes optimal exercise of the Company’s redemption option at the earliest possible date. See Note 12.
20
MICROVAST HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(In thousands of U.S. dollars, except share and per share data, or as otherwise noted)
13. FAIR VALUE MEASUREMENT - continued
Measured or disclosed at fair value on a recurring basis-continued
As of December 31, 2020 and September 30, 2021, information about inputs for the fair value measurements of the Group’s assets and liabilities that are measured at fair value on a recurring basis in periods subsequent to their initial recognition is as follow:
| Fair Value Measurement as of December 31, 2020 | ||||||||||||||||
| (In thousands) | Quoted Prices in Active Market for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | ||||||||||||
| Cash and cash equivalents | $ | $ | ||||||||||||||
| Restricted cash | ||||||||||||||||
| Total | $ | $ | ||||||||||||||
| Fair Value Measurement as of September 30, 2021 | ||||||||||||||||
| (In thousands) | Quoted Prices in Active Market for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | ||||||||||||
| Cash and cash equivalents | $ | $ | ||||||||||||||
| Restricted cash | ||||||||||||||||
| Total financial asset | $ | - | - | $ | ||||||||||||
| Warrant liability | $ | $ | ||||||||||||||
| Total financial liability | $ | $ | ||||||||||||||
The following is a reconciliation of the beginning and ending balances for Level 3 convertible notes during the nine months ended September 30, 2021:
| (In thousands) | Convertible Notes | |||
| Balance as of January 1, 2021 | $ | |||
| Issuance of convertible notes | ||||
| Changes in fair value of convertible notes | ||||
| Conversion as of Merger | ( | ) | ||
| Balance as of September 30, 2021 | $ | |||
The following is a reconciliation of the beginning and ending balances for Level 3 warrant liability during the nine months ended September 30, 2021:
| (In thousands) | Warrant Liability | |||
| Balance as of January 1, 2021 | $ | |||
| Assumed warrant liability upon Merger | ||||
| Changes in fair value | ( | ) | ||
| Balance as of September 30, 2021 | $ | |||
21
MICROVAST HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(In thousands of U.S. dollars, except share and per share data, or as otherwise noted)
13. FAIR VALUE MEASUREMENT - continued
Measured or disclosed at fair value on a nonrecurring basis
The Group measured the long-lived assets using the income approach—discounted cash flow method, when events or changes in circumstances indicate that the carrying amount of an asset may no longer be recoverable.
14. NONCONTROLLING INTERESTS
Noncontrolling interests of MPS
In
March 2017, Microvast, Inc. sold
In
February 2018, Microvast, Inc. signed a series of repurchase and redemption agreements with six out of the eight investors of MPS which
requested to redeem in aggregate
Pursuant to an extension agreement signed in September
2020, $
On
July 23, 2021, upon the completion of the Merger between Microvast, Inc. and Tuscan, the equity interest held by the investors who
remained noncontrolling shareholders of MPS were converted into
The Company has authorized
Immediately following the Merger, there were
22
MICROVAST
HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(In thousands of U.S. dollars, except share and per share data, or as otherwise noted)
16. PREFERRED SHARES
As of December 31, 2020, the Company had preferred
shares issued and outstanding as follows (share number of the Company’s preferred shares prior to the Merger have been retroactively
restated to reflect the Common Exchange Ratio of
| Preferred Shares | Number
of Shares | Shareholders | ||||
| Series C1 Preferred | ||||||
| Series C2 Preferred | ||||||
| Series D1 Preferred | ||||||
| Total | ||||||
On
July 23, 2021, upon the completion of the Merger between Microvast, Inc. and Tuscan, all preferred shares were converted into Common
Stock of the combined company at the Common Exchange Ratio of
The changes in the balance of Series Preferred and redeemable noncontrolling interests included in the mezzanine equity for the nine months ended September 30, 2020 and 2021 were as follows:
| (In thousands) | Series C1 Preferred | Series C2 Preferred | Series D1 Preferred | Redeemable noncontrolling interests | ||||||||||||
| Balance as of January 1, 2020 | $ | $ | $ | $ | ||||||||||||
| Accretion | ||||||||||||||||
| Ending balance as of September 30, 2020 | $ | $ | $ | $ | ||||||||||||
| Balance as of January 1, 2021 | $ | $ | $ | $ | ||||||||||||
| Accretion from January 1 to July 23 | ||||||||||||||||
| Conversion as of Merger | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Ending balance as of September 30, 2021 | $ | $ | $ | $ | ||||||||||||
23
MICROVAST
HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(In thousands of U.S. dollars, except share and per share data, or as otherwise noted)
17. SHARE-BASED PAYMENT
In 2012, Microvast, Inc. adopted a Share Incentive
Plan (the “2012 Plan”). The 2012 Plan permits the grant of options to purchase common stock, share appreciation rights, non-vested
shares and non-vested share units. The maximum aggregate number of shares of common stock that may be issued pursuant to all awards under
the share incentive plan is
In connection with the Merger, all outstanding
share awards granted under the 2012 Plan,
On July 21, 2021, the stockholders of the Company
approved the Microvast Holdings, Inc. 2021 Equity Incentive Plan (the “2021 Plan”), effective upon the Closing Date. The 2021
Plan provides for the grant of incentive and non-qualified stock option, restricted stock units, restricted share awards, stock appreciation
awards, and cash-based awards to employees, directors, and consultants of the Company. Options awarded under the 2021 Plan expire no more
than
Share options
During the three months and nine months ended
September 30, 2021, the Company recorded stock-based compensation expense of $
The modification date fair value of the stock options was determined using the Binomial-Lattice Model with the following assumptions:
| After modification | ||||
| Exercise price (1) | $ | |||
| Expected lives (years) (2) | ||||
| Volatility (3) | % | |||
| Risk-free interest rate (4) | % | |||
| Expected dividend yields (5) | % | |||
| Weighted average fair value of options modified | $ | |||
| (1) | Exercise price |
Exercise price was extracted from option agreements
| (2) | Expected lives |
Expected lives was derived from option agreements.
24
MICROVAST HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(In thousands of U.S. dollars, except share and per share data, or as otherwise noted)
17. SHARE-BASED PAYMENT - continued
| (3) | Volatility |
The volatility of the underlying common shares during the lives of the options was estimated based on the historical stock price volatility of comparable listed companies over a period comparable to the expected term of the options and the implied volatility of the Company.
| (4) | Risk-free interest rate |
Risk-free interest rate was estimated based on the market yield of US Government Bond with maturity close to the expected term of the options, plus country risk spread.
| (5) | Expected dividend yield |
The dividend yield was estimated by the Company based on its expected dividend policy over the expected term of the options.
Share options -Continued
Share options activity for the nine months ended September 30, 2020 and 2021 was as follows (all stock award activity was retroactively restated to reflect the conversion in July 2021):
| Share options life | Number of Shares | Weighted Average Exercise Price (US$) | Weighted Average Grant Date Fair Value (US$) | Weighted Average Remaining Contractual | ||||||||||||
| Outstanding as of January 1, 2020 | $ | $ | ||||||||||||||
| Grant | ||||||||||||||||
| Forfeited | ( | ) | ||||||||||||||
| Outstanding as of September 30, 2020 | $ | $ | ||||||||||||||
| Expected to vest and exercisable as of September 30, 2020 | $ | $ | ||||||||||||||
| Outstanding as of January 1, 2021 | ||||||||||||||||
| Forfeited | ( | ) | ||||||||||||||
| Outstanding as of September 30, 2021 | $ | $ | ||||||||||||||
| Expected to vest and exercisable as of September 30, 2021 | $ | $ | ||||||||||||||
The
total unrecognized equity-based compensation costs as of September 30, 2021 related to the stock options was $
25
MICROVAST HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(In thousands of U.S. dollars, except share and per share data, or as otherwise noted)
17. SHARE-BASED PAYMENT - continued
Capped Non-vested share units
The capped non-vested shares units represent rights
for the holder to receive cash determined by the number of shares granted multiplied by the lower of the fair market value and the capped
price, which will be settled in the form of cash payments. The capped non-vested shares units were accounted for as liability classified
awards. Upon conversion, the Company adjusted the terms of capped non-vested shares units outstanding as described above. The Company
recorded stock-based compensation expense of $
Non-vested share units activity for the nine months ended September 30, 2020 and 2021 was as follows (all award activity was retroactively restated to reflect the conversion in July 2021):
| Number on Non-Vested Shares | Weighted Average Grant Date Fair Value per Share (US$) | |||||||
| Outstanding as of January 1, 2020 | $ | |||||||
| Forfeited | ( | ) | $ | |||||
| Transfer from non-vested shares | $ | |||||||
| Outstanding as of September 30, 2020 | $ | |||||||
| Outstanding as of January 1, 2021 | $ | |||||||
| Outstanding as of September 30, 2021 | $ | |||||||
The
total unrecognized equity-based compensation costs as of September 30, 2021 related to the non-vested share units was
$
26
MICROVAST HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(In thousands of U.S. dollars, except share and per share data, or as otherwise noted)
17. SHARE-BASED PAYMENT - continued
Restricted Stock Units
Following the Merger, the Company granted
The fair value of RSUs is determined by the price
of Common Stock at the grant date and is amortized over the vesting period on a straight-line basis. The fair value of PSU awards that
include vesting based on market conditions are estimated using the Monte Carlo valuation method. Compensation cost for these awards is
recognized based on the grant date fair value which is recognized over the vesting period on a straight-line basis. Accordingly, the Company
recorded stock-based compensation expense of $
The following assumptions were used for respective period to calculate the fair value of common shares to be issued under TSR awards on the date of grant using the Monte Carlo pricing model:
Nine Months Ended September 30, | ||||
| Expected term (years) (1) | ||||
| Volatility (2) | % | |||
| Average correlation coefficient of peer companies (3) | ||||
| Risk-free interest rate (4) | % | |||
| Expected dividend yields (5) | % | |||
| (1) | Expected term |
Expected term was derived from award agreements.
27
MICROVAST HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(In thousands of U.S. dollars, except share and per share data, or as otherwise noted)
17. SHARE-BASED PAYMENT - continued
(2) Volatility
The volatility of the underlying common shares during the lives of the awards was estimated based on the historical stock price volatility of comparable listed companies over a period comparable to the expected term of the awards.
(3) Average correlation coefficient of peer companies
The correlation coefficients are calculated based upon the price data used to calculate the historical volatilities and is used to model the way in which each entity tends to move in relation to its peers.
(4) Risk-free interest rate
Risk-free interest rate was estimated based on the market yield of US Government Bond with maturity close to the expected term of the options, plus country risk spread.
(5) Expected dividend yield
The dividend yield was estimated by the Company based on its expected dividend policy over the expected term of the options.
The non-vested shares activity for the nine months ended September 30, 2020 and 2021 was as follows:
| Number
of Non-Vested Shares | Weighted Average Grant Date Fair Value Per Share (US$) | |||||||
| Outstanding as of January 1, 2020 | $ | |||||||
| Transfer to non-vested share units | ( | ) | $ | |||||
| Outstanding as of September 30, 2020 | ||||||||
| Outstanding as of January 1, 2021 | ||||||||
| Grant | $ | |||||||
| Vested | ( | ) | $ | |||||
| Outstanding as of September 30, 2021 | $ | |||||||
The
total unrecognized equity-based compensation costs as of September 30, 2021 related to the non-vested shares was $
Series B2 Preferred subscribed by employees
On
October 30, 2015, the Company issued
28
MICROVAST
HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(In thousands of U.S. dollars, except share and per share data, or as otherwise noted)
17. SHARE-BASED PAYMENT - continued
Series B2 Preferred subscribed by employees-continued
As
of December 31, 2020,
Upon the Merger, the Series B2 Preferred were
converted into
The following summarizes the classification of stock-based compensation:
| Three
Months Ended September 30, 2021 | ||||
| Cost of sales | $ | |||
| General and administrative | ||||
| Research and development expenses | ||||
| Selling and marketing expenses | ||||
| Construction in process | ||||
| Total | $ | |||
18. MAINLAND CHINA CONTRIBUTION PLAN
Full
time employees of the Group in the PRC participate in a government-mandated multiemployer defined contribution plan pursuant to which
certain pension benefits, medical care, unemployment insurance, employee housing fund and other welfare benefits are provided to employees.
Chinese labor regulations require the Group to accrue for these benefits based on certain percentages of the employees’ salaries.
The total provisions for such employee benefits were $
29
MICROVAST
HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(In thousands of U.S. dollars, except share and per share data, or as otherwise noted)
19. RELATED PARTY BALANCES AND TRANSACTIONS
| Name | Relationship with the Group | |
| Ochem | ||
| Ochemate |
| (1) | Related party transaction |
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2020 | 2021 | 2020 | 2021 | |||||||||||||
| Raw material sold to Ochem | $ | $ | $ | $ | ||||||||||||
| (2) | Interest-free loans |
MPS
received certain interest-free loans from related parties, Ochemate and Ochem, for the three months and nine months ended September 30,
2020 and 2021 with accumulative amounts of $
The
outstanding balance for the amount due from Ochem was as of December 31, 2020 and $
20. NET LOSS PER SHARE
The following table sets forth the computation of basic and diluted net loss per share for the periods indicated:
| Three Months Ended September 30, | Nine
Months Ended September 30, |
|||||||||||||||
| 2020 | 2021 | 2020 | 2021 | |||||||||||||
| Numerator: | ||||||||||||||||
| Net loss attributable to ordinary shareholders | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
| Denominator: | ||||||||||||||||
| Weighted average ordinary shares outstanding used in computing basic and diluted net loss per share | ||||||||||||||||
| Basic and diluted net loss per share | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
30
MICROVAST HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(In thousands of U.S. dollars, except share and per share data, or as otherwise noted)
20. NET LOSS PER SHARE - continued
For the three and nine months ended September 30, 2020 and 2021, the following shares outstanding were excluded from the calculation of diluted net loss per ordinary share, as their inclusion would have been anti-dilutive for the periods prescribed.
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2020 | 2021 | 2020 | 2021 | |||||||||||||
| Shares issuable upon exercise of share options | ||||||||||||||||
| Shares issuable upon vesting of non-vested shares | ||||||||||||||||
| Shares issuable upon exercise of warrants | ||||||||||||||||
| Shares issuable upon conversion of Series B2 Preferred | ||||||||||||||||
| Shares issuable upon conversion of Series C1 Preferred | ||||||||||||||||
| Shares issuable upon conversion of Series C2 Preferred | ||||||||||||||||
| Shares issuable upon conversion of Series D1 Preferred | ||||||||||||||||
| Shares issuable upon conversion of Series D2 Preferred | ||||||||||||||||
| Shares issuable upon conversion of non-controlling interests of a subsidiary | ||||||||||||||||
| Shares issuable upon vesting of Earn-out shares | ||||||||||||||||
| Shares issuable that may be subject to cancellation | ||||||||||||||||
21. COMMITMENTS AND CONTINGENCIES
Litigation
| ● | Mr. Smith |
On September 4, 2017, Matthew Smith, a former employee of the Company, sent a demand letter to the Company alleging claims for breach of contract (involving stock options) and discrimination. On October 5, 2017, Mr. Smith filed a charge of discrimination with the United States Equal Employment Opportunity Commission (“EEOC”) alleging the same discrimination claims and also claiming his employment was terminated in retaliation for his prior discrimination complaints. On September 18, 2019, EEOC dismissed Matthew Smith’s claim in its entirety and stated that “No finding is made as to any other issues that might be constructed as having been raised by this charge.”
On
February 5, 2018, Mr. Smith filed suit against the Company asserting claims for breach of contract and asserting discrimination and retaliation
claims. In this action, Mr. Smith seeks the following relief: (1) a declaration that he owns
The outcome of any litigation is inherently uncertain and the amount of potential loss if any, associated with the resolution of such litigation, cannot be reasonably estimated. As such, no accrual for contingency loss was recorded in the consolidated financial statements for the three and nine months ended September 30, 2020 and 2021.
Capital commitments
Capital
commitments for construction of property and purchase of property, plant and equipment were $
31
MICROVAST HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(In thousands of U.S. dollars, except share and per share data, or as otherwise noted)
21. COMMITMENTS AND CONTINGENCIES - continued
Lease commitments
Future minimum payments under lease commitments as of September 30, 2021 were as follows:
| 2021 | ||||
| Three months period ending December 31, 2021 | $ | |||
| 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Thereafter | ||||
| Total Lease Liabilities | $ | |||
22. SUBSEQUENT EVENTS
New RSU and PSU Grants
On October 27, 2021, the Company granted
Acquisition of Building
In October 2021, the Group acquired a building
in Florida, United States, at the cost of $
32
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
References in this report (the “Report”) to the “Company,” “Microvast Holdings, Inc.,” “Microvast,” “our,” “us” or “we” refer to Microvast 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
On July 23, 2021 (the “Closing Date”), Microvast Holdings, Inc. (formerly known as Tuscan Holdings Corp.) consummated the previously announced acquisition of Microvast, Inc., a Delaware corporation (“Microvast”), pursuant to the Agreement and Plan of Merger (the “Merger Agreement”) dated February 1, 2021, between Tuscan Holdings Corp. (“Tuscan”), Microvast and TSCN Merger Sub Inc., a Delaware corporation (“Merger Sub”), pursuant to which Merger Sub merged with and into Microvast, with Microvast surviving the merger (the “Merger”).
In connection with the Merger Agreement, Tuscan, MVST SPV LLC, a wholly owned subsidiary of Tuscan (“MVST SPV”), Microvast Power System (Huzhou) Co., Ltd., Microvast’s majority owned subsidiary (“MPS”), certain MPS convertible loan investors (the “CL Investors”) and certain minority equity investors in MPS (the “Minority Investors” and, together with the CL Investors, the “MPS Investors”) and certain other parties entered into a framework agreement (the “Framework Agreement”), pursuant to which, among other things, (1) the CL Investors waived certain rights with respect to the convertible loans (the “Convertible Loans”) held by such CL Investors that were issued under that certain Convertible Loan Agreement, dated November 2, 2018, among Microvast, MPS, such CL Investors and the MPS Investors (the “Convertible Loan Agreement”) and, in connection therewith, certain affiliates of the CL Investors (“CL Affiliates”) subscribed for 6,719,845 shares of common stock, $0.0001 par value per share (“Common Stock”), of Tuscan in a private placement in exchange for MPS convertible loans (the “CL Private Placement”).
In connection with the Merger Agreement, Tuscan entered into subscription agreements with (a) the holders of an aggregate of $57,500,000 outstanding promissory notes issued by Microvast (the “Bridge Notes”) pursuant to which Tuscan agreed to issue an aggregate of 6,736,106 shares of common stock upon conversion of the Bridge Notes (the “Bridge Notes Conversion”), and (b) a number of outside investors who agreed to purchase an aggregate of 48,250,000 shares of common stock at a price of $10.00 per share, for an aggregate purchase price of $482,500,000 (the “PIPE Financing”).
The CL Private Placement, the Bridge Notes Conversion and the PIPE Financing closed contemporaneously with the closing under the Merger Agreement (collectively, the “Closing”). Upon the Closing of the Merger, the CL Private Placement, the Bridge Notes Conversion, the PIPE Financing and related transactions (collectively, the “Business Combination”), Microvast became a wholly-owned subsidiary of the Company, with the stockholders of Microvast becoming stockholders of the Company, and with the Company renamed “Microvast Holdings, Inc.”
Company’s Business following the Business Combination
We are a technology innovator for lithium 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: LTO, LFP, NMC-1 and 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 grid management and frequency regulation.
33
Additionally, as a vertically integrated battery company, we design, develop and manufacture the following battery components: cathode, anode, electrolyte and separator. We will also market our FCG cathode and polyaramid separator to passenger car original equipment manufacturers (“OEMs”) and consumer electronics manufacturers.
Since we launched our first ultra-fast battery system in 2009, we have sold and delivered approximately 2,422.3 MWh of battery systems. As of September 30, 2021, we had a backlog order of approximately $52.7 million for our battery systems equivalent to approximately 214.6 MWh, compared to the backlog order of approximately $31.9 million for our battery systems equivalent to approximately 90.8 MWh as of September 30, 2020. Our revenue for the three months ended September 30, 2021 increased $6.1 million, or 20.0%, compared to the same period in 2020.
After initially focusing on the PRC and Asia & Pacific region, we have expanded our presence and product promotion to Europe and the United States to capitalize on their rapidly growing electrification markets.
In Europe, we have delivered over 1,500 units of ultra-fast charging battery systems to bus OEMs and operators as of September 30, 2021. Small-scale prototype projects are ongoing with regard to sports cars, commercial vehicles, trucks, port equipment and marine applications. In addition, we are jointly developing electric power-train solutions with leading commercial vehicle OEMs and a first-tier automotive supplier using LTO, NMC1 and NMC2 technologies.
Key Factors Affecting Our Performance
We believe that our future success will be dependent on several factors, including those 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.
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. In the future, we intend to continue to invest in R&D in order to continually develop and introduce innovative products. 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 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. We expect to use some of the proceeds from the Business Combination to expand our manufacturing facilities to increase our manufacturing output to address our backlog and to capture growing market opportunities. The capacity expansion will be carried out in a measured manner based on our ongoing assessment of medium- and long-term demand for our solutions. Our planned capacity expansion will require significant 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.
34
Sales Geographic Mix
After primarily being focused on the PRC and Asia & Pacific region, we are expanding our presence and product promotion to Europe and the United States to capitalize on the rapidly growing elective vehicle markets in those geographies. As we expand our geographic focus to Europe and the United States, we believe sales of our products in Europe and the United States will generate higher gross margins. It has been our experience that buyers in Europe and the United States are more motivated by the technologies, quality and total cost ownership 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.
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, the Asia & Pacific region, Europe and the United States 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, operations, supply chains, and distribution systems, and has resulted in a one-month shutdown of our factories and in delivery delays. During the nine months ended September 30, 2021, we faced unanticipated challenges caused by the continued impact of global pandemic. Certain customers deferred their purchases due to the pandemic. Due to precautionary measures related to COVID-19 and resulting global economic impacts, we may experience further reductions in demand for certain of our products.
Basis of Presentation
We currently conduct our business through one operating segment. Our historical results are reported in accordance with U.S. GAAP and in U.S. dollars.
Liquidity and Capital Resources
Since inception, we have financed our operations primarily from capital contributions from equity holders, issuance of convertible notes and bank borrowings. As of September 30, 2021, our principal sources of liquidity were our cash and cash equivalents in the amount of $572.6 million.
As of September 30, 2021, we had bank borrowings of $22.9 million, the terms of which range from 6 months to 12 months. The interest rates of our bank borrowings ranged from 5% to 6.31% per annum. As of September 30, 2021, 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 of September 30, 2021, we were in compliance with all material terms and covenants of our loan agreements, credit agreements, bonds and notes.
35
The consolidated net cash position as of September 30, 2021 included cash, cash equivalents and restricted cash of $80.7 million held by our PRC subsidiaries that is not available to fund domestic operations unless funds are repatriated. Should we need to repatriate to the U.S. part or all of the funds held by our PRC subsidiaries, we would need to accrue and pay withholding taxes equivalent to 10% of the funds repatriated. 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, the EU and the United States.
On July 23, 2021, the Business Combination was completed. The net proceeds from the Merger include $708.4 million cash to be retained for the purposes of working capital, business expansion and capital expenditure. We believe we will be able to meet our working capital requirements for at least the next 12 months.
Cash Flows
The following table provides a summary of our cash flow data for the periods indicated:
| Nine
Months Ended September 30, | ||||||||
| 2020 | 2021 | |||||||
| Amount in thousands | ||||||||
| Net cash provided by (used in) operating activities | 5,799 | (24,653 | ) | |||||
| Net cash used in investing activities | (14,425 | ) | (40,718 | ) | ||||
| Net cash (used in) provided by financing activities | (2,360 | ) | 634,370 | |||||
Cash Flows from Operating Activities
During the nine months ended September 30, 2021, our operating activities used $24.7 million in cash. This decrease in cash consisted of (1) $19.5 million in cash paid after adjusting our net loss for non-cash and non-operating items, of which $14.4 million is depreciation of property, plant and equipment, $9.9 million loss on change in fair value of convertible notes, and $1.1 million gain on change in fair value of warrant; (2) $5.2 million decrease in cash flows from operating assets and liabilities including $20.2 million cash inflow due to collection of accounts receivable and notes receivable.
Cash Flows from Investing Activities
During the nine months ended September 30, 2021, cash used in investing activities totaled $40.7 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 nine months ended September 30, 2021, cash provided by financing activities totaled $634.4 million. This cash inflow was a result of $26.6 million proceeds from bank borrowings, $57.5 million proceeds from the issuance of convertible notes to new investors and $708.4 million from Merger and PIPE financing, partially offset by $15.7 million repayment on bank borrowings and $139.0 payment to exited noncontrolling interests and $3.4 million payment for transaction fee.
36
Components of Results of Operations
Revenue
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 are also expanding 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 September 30, | ||||||||||||||||
| 2020 | 2021 | |||||||||||||||
| (In thousands) | Amt | % | Amt | % | ||||||||||||
| Asia & Pacific Region | $ | 23,945 | 78 | % | $ | 31,792 | 86 | % | ||||||||
| Europe | 6,446 | 21 | % | 4,908 | 13 | % | ||||||||||
| Others | 362 | 1 | % | 194 | 1 | % | ||||||||||
| Total | $ | 30,753 | 100 | % | $ | 36,894 | 100 | % | ||||||||
| Nine Months Ended September 30, | ||||||||||||||||
| 2020 | 2021 | |||||||||||||||
| (In thousands) | Amt | % | Amt | % | ||||||||||||
| Asia & Pacific Region | $ | 42,632 | 72 | % | $ | 73,360 | 87 | % | ||||||||
| Europe | 16,376 | 27 | % | 11,466 | 13 | % | ||||||||||
| Others | 392 | 1 | % | 378 | 0 | % | ||||||||||
| Total | $ | 59,400 | 100 | % | $ | 85,204 | 100 | % | ||||||||
We have historically derived a portion of our revenue in a given reporting period from a limited number of key customers, which varied 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 September 30, | ||||||||
| 2020 | 2021 | |||||||
| A | 18 | % | — | % | ||||
| B | — | % | 17 | % | ||||
| Nine
Months Ended September 30, | ||||||||
| 2020 | 2021 | |||||||
| C | 11 | % | — | % | ||||
| A | 10 | % | — | % | ||||
| D | — | % | 12 | % | ||||
| B | — | % | 11 | % | ||||
Cost of Revenue and Gross Profit
Cost of revenues includes the cost of manufacturer costs of finished goods, salaries and related personnel expenses, including stock-based compensation, warranty costs and depreciation and related expenses that are directly attributable to the manufacturing of products.
Gross profit is equal to revenue less cost of revenues. Gross profit margin is equal to gross profit divided by revenue.
37
Operating Expense
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 stock-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, including stock-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 stock-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.
Income Tax Expense
We are subject to income taxes in the United States and foreign jurisdictions in which we do business, namely the PRC, Germany and the United Kingdom. These foreign jurisdictions have statutory tax rates different from those in the United States. Accordingly, our effective tax rates will vary depending on the relative proportion of foreign to U.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 the U.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 and New Tech Enterprises” and thus enjoyed a preferential income tax rate of 15%. Federal corporate income tax rate of 21% is applied for our U.S. entity. Income tax in the United Kingdom is calculated at an average tax rate of 19% of the estimated assessable profit of our subsidiary in the United Kingdom. German enterprise income tax, which is a combination of corporate income tax and trade tax, is calculated at 31.9% of the estimated assessable profit of our subsidiary in Germany.
38
Results of Operations
Comparison of the Three Months Ended September 30, 2021 to the Three Months Ended September 30, 2020
The following table sets forth our historical operating results for the periods indicated:
| Three Months Ended September 30, | $ | % | ||||||||||||||
| 2020 | 2021 | 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 | )% | |||||||||
| 12.0 | % | (97.3 | )% | |||||||||||||
| Operating expenses: | ||||||||||||||||
| General and administrative expenses | (4,721 | ) | (57,058 | ) | (52,337 | ) | 1,108.6 | % | ||||||||
| Research and development expenses | (4,558 | ) | (13,518 | ) | (8,960 | ) | 196.6 | % | ||||||||
| Selling and marketing expenses | (3,456 | ) | (7,380 | ) | (3,924 | ) | 113.5 | % | ||||||||
| Total operating expenses | (12,735 | ) | (77,956 | ) | (65,221 | ) | 512.1 | % | ||||||||
| Subsidy income | (39 | ) | 545 | 584 | (1,497.4 | )% | ||||||||||
| Operating loss | (9,096 | ) | (113,296 | ) | (104,200 | ) | 1,145.6 | % | ||||||||
| Other income and expenses: | ||||||||||||||||
| Interest income | 66 | 97 | 31 | 47 | % | |||||||||||
| Interest expense | (1,397 | ) | (1,247 | ) | 150 | (10.7 | )% | |||||||||
| Other income (expense), net | 68 | (19 | ) | (87 | ) | (127.9 | )% | |||||||||
| Loss on changes in fair value of convertible notes | - | (3,018 | ) | (3,018 | ) | (100.0) | % | |||||||||
| Gain on change in fair value of warrant liability | - | 1,113 | 1,113 | 100.0 | % | |||||||||||
| Loss before income tax | (10,359 | ) | (116,370 | ) | (106,011 | ) | 1,023.4 | % | ||||||||
| Income tax benefit (expense) | 270 | (106 | ) | (376 | ) | (139.3 | )% | |||||||||
| Loss | (10,089 | ) | (116,476 | ) | (106,387 | ) | 1,054.5 | % | ||||||||
Revenue
Our revenue increased from approximately $30.8 million for three months ended September 30, 2020 to approximately $36.9 million for the same period in 2021 primarily driven by the increase in sales of battery cell products to new customers and the increase in sales to existing customers in the Asia & Pacific region.
Cost of Revenue and Gross Profit
Our cost of sales for the three months ended September 30, 2021 increased $45.7 million, or 168.8%, compared to the same period in 2020.
Our gross profit margin decreased from 12.0% for the three months ended September 30, 2020 to (97.3%) for the same period in 2021. The increase in cost of sales and the decrease in gross margin was primarily due to (i) increase in product warranty cost, (ii) increases in material prices since the end of 2020, (iii) disposal of some legacy product at or below their original costs to produce, (iv) an increase in the share-based compensation expense recorded since the third quarter of 2021, and (v) a lower volume of orders placed for a specific manufacturing line as a result of the industry-wide semiconductor shortage, which resulted in a higher manufacturing cost per unit.
Certain legacy products that were sold during 2017 and 2018 to our PRC-based customers did not meet our high standards and experienced performance issues. Following a rigorous root cause analysis completed in October 2021, we determined that a component sourced from a third-party supplier was not meeting the Company’s performance standards. It is our expectation that these legacy products will need to be replaced before the expiration of the product warranty in their respective sales contracts with our customers.
We believe this issue is limited to this legacy product which we ceased selling in late 2018, as the component was not incorporated into any other products. Accordingly, we feel it is prudent to take an additional warranty reserve and the accrued cost of $35.6 million for the three months ended September 30, 2021.
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Operating Expense
Selling and Marketing
Selling and marketing expenses for the three months ended September 30, 2021 increased $3.9 million, or 113.5%, compared to the same period in 2020. The increase in selling and marketing expenses was primarily due to increased personnel-related expenses as we increased headcount of our sales and marketing team and the increased share-based compensation expense recorded during the third quarter of 2021.
General and Administrative
General and Administrative expenses for the three months ended September 30, 2021 increased $52.3 million, or 1,108.6%, compared to the same period in 2020. The increase in General and Administrative expenses was primarily due to increased administrative headcount to support our overall growth and the increased share-based compensation expense recorded during the third quarter of 2021.
Research and Development
Research and Development expenses for the three months ended September 30, 2021 increased $9.0 million, or 196.6%, compared to the same period in 2020. The increase in Research and Development expenses was primarily due to (i) increased costs of materials used for experiments due to more testing activities; (ii) increased personnel-related expenses as we increased headcount of our research team as a result of our efforts to further develop and enhance our products; and (iii) the increased share-based compensation expense recorded during the third quarter of 2021.
Loss on changes in fair value of convertible notes
In the three months ended September 30, 2021, we incurred a loss of $3.0 million due to changes in fair value of convertible notes in connection with the issuance of convertible notes in January and February 2021 to new investors.
Gain on change in fair value of warrant liability
In the three months ended September 30, 2021, we incurred gain of $1.1 million due to change in fair value of warrant liability.
Comparison of the Nine Months Ended September 30, 2021 to the Nine Months Ended September 30, 2020
The following table sets forth our historical operating results for the periods indicated:
Nine Months Ended September 30, | $ | % | ||||||||||||||
| 2020 | 2021 | 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 expenses: | ||||||||||||||||
| General and administrative expenses | (12,670 | ) | (67,810 | ) | (55,140 | ) | 435.2 | % | ||||||||
| Research and development expenses | (12,518 | ) | (23,199 | ) | (10,681 | ) | 85.3 | % | ||||||||
| Selling and marketing expenses | (9,464 | ) | (14,242 | ) | (4,778 | ) | 50.5 | % | ||||||||
| Total operating expenses | (34,652 | ) | (105,251 | ) | (70,599 | ) | 203.7 | % | ||||||||
| Subsidy income | 802 | 2,676 | 1,874 | 233.7 | % | |||||||||||
| Operating loss | (25,400 | ) | (146,471 | ) | (121,071 | ) | 476.7 | % | ||||||||
| Other income and expenses: | ||||||||||||||||
| Interest income | 502 | 304 | (198 | ) | (39.4 | )% | ||||||||||
| Interest expense | (4,234 | ) | (4,630 | ) | (396 | ) | 9.4 | % | ||||||||
| Other income, net | 63 | 25 | (38 | ) | (60.3 | )% | ||||||||||
| Loss on changes in fair value of convertible notes | - | (9,861 | ) | (9,861 | ) | (100.0) | % | |||||||||
| Gain on change in fair value of warrant liability | - | 1,113 | 1,113 | 100.0 | % | |||||||||||
| Loss before income tax | (29,069 | ) | (159,520 | ) | (130,451 | ) | 448.8 | % | ||||||||
| Income tax expense | (5 | ) | (324 | ) | (319 | ) | 6,380.0 | % | ||||||||
| Loss | (29,074 | ) | (159,844 | ) | (130,770 | ) | 449.8 | % | ||||||||
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Revenue
Our revenue increased from approximately $59.4 million for the nine months ended September 30, 2020 to approximately $85.2 million for the same period in 2021 primarily driven by the increase in sales of battery cell products to new customers and the increase in sales to existing customers in the Asia & Pacific region.
Cost of Revenue and Gross Profit
Our cost of sales for the nine months ended September 30, 2021 increased $78.2 million, or 153.4%, compared to the same period in 2020.
Our gross profit margin decreased from 14.2% for the nine months ended September 30, 2020 to (51.5)% for the same period in 2021. The increase in cost of sales and the decrease in gross margin was primarily due to (i) increases in product warranty cost, (ii) increases in material prices since the end of 2020, (v) disposal of some legacy product at or below their original costs to produce, (iv) an increase in the share-based compensation expense recorded since the third quarter of 2021, (v) the proportionally higher sales to PRC customers with lower average selling price compared with the price to customers outside PRC, and (vi) a lower volume of orders placed for a specific manufacturing line as a result of the industry-wide semiconductor chip shortage, which resulted in a higher manufacturing cost per unit.
Certain products we sold during 2017 and 2018 to our PRC based customers recently experienced performance that does not meet our high standards. Following a rigorous root cause analysis completed in the third quarter of 2021, we determined that a component sourced from a third-party supplier was not meeting the Company’s performance standards. It is our expectation that these legacy products will need to be replaced before the expiration of the product warranty in their respective sales contracts with our customers.
We believe this issue is limited to this legacy product which we ceased selling in late 2018, as the component was not incorporated into any other products. Accordingly, we feel it is prudent to take an additional warranty reserve and the accrued cost for nine months ended September 30, 2021 was $44.6 million.
Operating Expense
Selling and Marketing
Selling and marketing expenses for the nine months ended September 30, 2021 increased $4.8 million, or 50.5%, compared to the same period in 2020. The increase in selling and marketing expenses was primarily due to the expansion into Europe and the share-based compensation expense recorded during the third quarter of 2021.
General and Administrative
General and Administrative expenses for the nine months ended September 30, 2021 increased $55.1 million, or 435.2%, compared to the same period in 2020. The increase in General and Administrative expenses was primarily due to increased administrative headcount to support our overall growth and the share-based compensation expense recorded during the third quarter of 2021.
Research and Development
Research and Development expenses for the nine months ended September 30, 2021 increased $10.7 million, or 85.3%, compared to the same period in 2020. The increase in Research and Development expenses was primarily due to (i) increased costs of materials used for experiments due to more testing activities; (ii) increased personnel-related expenses as we increased headcount of our research team as a result of our efforts to further develop and enhance our products; and (iii) the increased share-based compensation expense recorded during the third quarter of 2021.
Subsidy Income
Subsidy income increased from $0.8 million in the nine months ended September 30, 2020 to $2.7 million in the same period in 2021, primarily due to a one-time award granted by local governments in the PRC in the first quarter of 2021.
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Loss on Changes in Fair Value of Convertible Notes
In the nine months ended September 30, 2021, we incurred a loss of $9.9 million due to changes in fair value of convertible notes in connection with the issuance of convertible notes in January and February 2021 to new investors.
Gain on change in fair value of warrant liability
In the nine months ended September 30, 2021, we incurred a gain of $1.1 million due to change in fair value of warrant liability.
Contractual Obligations
Our capital expenditures amounted to $18.6 million and $40.7 million for the nine months ended September 30, 2020 and 2021, respectively. Our capital expenditures for the nine months ended September 30, 2020 and 2021 related primarily to the construction of manufacturing facilities under our expansion plan.
In 2021, we started our capacity expansion plans in Huzhou, China, Berlin, Germany and Clarkesville, Tennessee. Both projects are expected to be completed by Q2 2023 to increase our existing production capacity by 4 GWH. We expect the total capital expenditures related to the capacity expansion to be approximately $420 million, which we plan to finance primarily through the proceeds from the Business Combination.
Our planned capital expenditure amounts 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.
The following table summarizes our contractual obligations and other commitments for cash expenditures as of December 31, 2020 and the years in which these obligations are due:
| Payments Due by Period | ||||||||||||||||||||
| Total | Less than 1 Year | 1 – 3 Years | 3 – 5 Years | More than 5 years | ||||||||||||||||
| Amount 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 | |||||||||||||||
| – Short-term bank borrowings | 113 | 113 | — | — | — | |||||||||||||||
| – Bond payable | 8,534 | 1,712 | 4,919 | 1,738 | 165 | |||||||||||||||
| – Payable for redemption of noncontrolling interest | 33,533 | 9,473 | 20,057 | 4,003 | — | |||||||||||||||
| 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 | ||||||||||
| * | The convertible bond and deposit liability for series B2 convertible preferred shares were convert to equity in connection with the Business Combination. |
Critical Accounting Policies
Our consolidated financial statements are prepared in accordance with U.S. GAAP. The preparation of these 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.
We believe the following critical accounting policies involve a higher degree of judgment and complexity than our other accounting policies. Therefore, these are the policies we believe are the most critical to understanding and evaluating our consolidated financial condition and results of operations.
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Revenue Recognition
Nature of Goods and Services
Our sales revenue consists primarily of sales of lithium batteries. Our obligation is providing electronic power products. Revenue is recognized at the point of time when control of the promised goods or services is transferred to the customer, in an amount that reflects the consideration we expect to be entitled to in exchange for the goods or services.
Disaggregation of Revenue
For the year ended December 31, 2020 and the nine months ended September 30, 2021, we derived revenues of $82.7 million and $73.4 million from the Asia & Pacific region, $24.3 million and $11.5 million from Europe, and $0.5 million and $0.4 million from other geographic regions where the customers are located, respectively.
Sales Incentive
In 2018, we provided sales incentives to some of our customers, which mainly relates the reduced sales prices. The sales incentives are discounts to be applied to future sales to the customer which cannot be exchanged for cash. To the extent that the sales incentives represent a material right or option to acquire additional goods or services at a discount in the future period, the material right is recognized as a separate performance obligation at the outset of the arrangement based on the most likely amount of incentive to be provided to the customer. Amounts allocated to a material right are recognized as revenue when those future goods are sold to the customers. During 2020 and the nine months ended September 30, 2021, no such sales incentives were granted to customers.
Contract Balances
Contract balances include accounts receivable and advance from customers. Accounts receivable represent cash not received from customers and are recorded when the right to consideration is unconditional. The allowance for doubtful accounts reflects the best estimate of probable losses inherent to the account receivable balance. Contract liabilities, recorded in advance from customers in the consolidated balance sheet, represent payment received in advance or payment received related to a material right provided to a customer to acquire additional goods or services at a discount in a future period. During the year ended December 31, 2020 and the nine months ended September 30, 2021, we recognized $0.6 million and $1.4 million of revenue previously included in advance from customers as of January 1, 2020 and 2021, respectively, which consist of payments received in advance related to our sales of lithium batteries.
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Product Warranty
We provide product warranties, which entail repair or replacement of non-conforming items, in conjunction with sales of products. Estimated costs related to warranties are recorded in the period in which the related product sales occur. The warranty liability recorded at each balance sheet date reflects management’s best estimates of its product warranties based on historical information and other currently available evidence.
Our product warranties generally range from one to eight years. We established a reserve for the estimated cost of the product warranty at the time revenue is recognized. The portion of the warranties we expect to incur within the next 12 months is recorded in accrued expenses and other current liabilities, while the remainder is recorded in other non-current liabilities on the consolidated balance sheets. Warranty reserves are recorded as a cost of revenue.
In 2021, as a result of the increases in the repairing cost and frequency of claims with respect to a legacy product sold in 2017 and 2018, we conducted intensive experiments and a root cause analysis, which was completed in October 2021. We concluded that a component purchased from a supplier was not meeting the Company’s performance standards. As a result, we expect that the impacted legacy products sold will need to be replaced before the expiration of warranty term. This reassessment resulted in a change in estimate for additional accrual of $34.1 million for such legacy product sold in the third quarter of 2021. As the component was not incorporated into other products, no additional accrual was made to other existing products sold. We are in negotiation with the supplier for compensation and will take legal action if necessary.
Inventories
Our inventories consist of raw materials, work in process and finished goods. Inventories are stated at the lower of cost or net realizable value. Inventory costs include expenses that are directly or indirectly incurred in the acquisition, including shipping and handling costs charged to us by suppliers, and production of manufactured product for sale. Costs of materials and supplies used in production, direct labor costs and allocated overhead costs are all included in the inventory costs. The allocated overhead cost includes the depreciation, insurance, employee benefits, and indirect labor. Cost is determined using the weighted average method. Inventories are written down to net realizable value taking into consideration estimates of future demand, technology developments, market conditions and reasonably predicative costs of completion or disposal.
We record inventory impairment losses of $1.3 million and $12.7 million during the nine months ended September 30, 2020 and 2021, respectively as we had to sell certain products that did not qualify for the revised subsidies at lower prices. We monitor the inventory impairments periodically and since battery technology continues to advance, we may incur inventory impairment losses in the future.
Income Taxes
Current income taxes are provided for in accordance with the laws of the relevant tax authorities. Deferred income taxes are recognized when temporary differences exist between the tax bases of assets and liabilities and their reported amounts in the consolidated financial statements. Net operating loss carry forwards and credits are applied using enacted statutory tax rates applicable to future years. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more-likely-than-not that a portion of or all of the deferred tax assets will not be realized.
We account for uncertain tax positions by reporting a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. Tax benefits are recognized from uncertain tax positions when we believe that it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. We recognize interest and penalties, if any, related to unrecognized tax benefits in income tax expense.
Stock-Based Compensation
We recognize compensation expense on a straight-line basis over the service period that awards are expected to vest, based on the estimated fair value of the awards on the date of the grant. We recognize forfeitures as they occur. Fair value excludes the effect of non-market based vesting conditions. The fair value of RSUs with service conditions is based on the grant date share price. We estimate the fair value of options utilizing the Binomial-Lattice Model. The fair value of non-vested shares that vest based on market conditions are estimated using the Monte Carlo valuation method. These fair value estimates of stock related awards and assumptions inherent therein are estimates and, as a result, may not be reflective of future results or amounts ultimately realized by recipients of the grants. For these awards with performance conditions, we recognize compensation expense when the performance goals are achieved, or when it becomes probable that the performance goals will be achieved. Management performs the probability assessment on a quarterly basis by reviewing external factors, such as macroeconomic conditions and the analog industry revenue forecasts, and internal factors, such as our business and operational objectives and revenue forecasts. Changes in the probability assessment of achievement of the performance conditions are accounted for in the period of change by recording a cumulative catch-up adjustment as if the new estimate had been applied since the service inception date. As a result, our stock-based compensation expense is subject to volatility and may fluctuate significantly each quarter due to changes in our probability assessment of achievement of the performance conditions or actual results being different from projections made by management. Liability-classified awards are remeasured at their fair-value-based measurement as of each reporting date until settlement.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
Our cash and cash equivalents consist of cash and money market accounts. Such interest-earning instruments carry a degree of interest rate risk. To date, fluctuations in interest income have not been significant. Our borrowings under our line of credit carry variable interest rates so such risks are limited as it relates to our current borrowings.
The primary objective of our investment activities is to preserve principal while maximizing income without significantly increasing risk. Because our cash equivalents have a short maturity, our portfolio’s fair value is relatively insensitive to interest rate changes. We do not believe that an increase or decrease in interest rates of 100 basis points would have a material effect on our operating results or financial condition. In future periods, we will continue to evaluate our investment policy in order to ensure that we continue to meet our overall objectives.
Foreign Currency Risk
Our major operational activities are carried out in the PRC and a majority of the transactions are denominated in Renminbi. The volatility of exchange rates depends on many factors that we cannot forecast with reliable accuracy. We have experienced and will continue to experience fluctuations in our operating results as a result of transaction gains and losses related to translating certain cash balances, trade accounts receivable and payable balances, and intercompany balances that are denominated in currencies other than the U.S. Dollar, principally Renminbi. The effect of an immediate 10% adverse change in foreign exchange rates on Renminbi-denominated accounts as of September 30, 2021, including intercompany balances, would result in a foreign currency loss of $1.7 million. In the event our foreign sales and expenses increase, our operating results may be more greatly affected by fluctuations in the exchange rates of the currencies in which we do business. At this time, we do not, but we may in the future, enter into derivatives or other financial instruments in an attempt to hedge our foreign currency exchange risk. It is difficult to predict the impact hedging activities would have on our results of operations.
Credit Risk
Our credit risk primarily relates to our trade and other receivables, restricted cash, cash equivalents and amounts due from related parties. We generally grant credit only to clients and related parties with good credit ratings and also closely monitor overdue debts. In this regard, we consider that the credit risk arising from our balances with counterparties is significantly reduced.
In order to minimize the credit risk, we have delegated a team responsible for determining credit limits, credit approvals and other monitoring procedures to ensure that follow-up action is taken to recover overdue debts. In addition, we review the recoverable amount of each individual debtor at the end of each reporting period to ensure that adequate impairment losses are made for irrecoverable amounts. We will negotiate with the counterparties of the debts for settlement plans or changes in credit terms, should the need arise. In this regard, we consider that our credit risk is significantly reduced.
Seasonality
We typically experience higher sales during our third and fourth fiscal quarters as compared to our first and second fiscal quarters due to reduced purchases from our customers, who are mainly Chinese bus OEMs, during the Chinese Spring Festival holiday season in our first fiscal quarter. However, our limited operational history makes it difficult for us to judge the exact nature or extent of the seasonality of our business.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of September 30, 2021. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of September 30, 2021, based on two material weaknesses identified below. In light of these material weaknesses, we performed additional analysis as deemed necessary to ensure that our financial statements were prepared in accordance with U.S. GAAP. Based on such analysis and notwithstanding the identified material weaknesses, management, including our Chief Executive Officer and Chief Financial Officer, believe the condensed consolidated financial statements included in this Report fairly represent in all material respects our financial condition, results of operations and cash flows at and for the periods presented in accordance with U.S. GAAP.
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Material Weakness
In the course of auditing our consolidated financial statements as of and for the years ended December 31, 2018, 2019 and 2020 in accordance with PCAOB auditing standards, Microvast and its independent registered public accounting firm identified two material weaknesses and certain information technology related deficiencies in our internal control over financial reporting. As defined in the standards established by the PCAOB, a “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our company’s annual or interim financial statements will not be prevented or detected on a timely basis.
One material weakness that has been identified related to the insufficient financial reporting and accounting personnel with appropriate U.S. GAAP knowledge and SEC reporting requirements to properly address complex U.S. GAAP technical accounting issues and to prepare and review financial statements and related disclosures in accordance with U.S. GAAP and financial reporting requirements set forth by the SEC. The other material weakness that has been identified related to the lack of comprehensive accounting policies and procedures manual including comprehensive book closing procedures in accordance with U.S. GAAP. Either of these material weaknesses, if not timely remedied, may lead to significant misstatements in our consolidated financial statements in the future. For example, due to the lack of comprehensive book closing procedures, a cutoff error was rectified by restatement of the consolidated balance sheet and statement of operations as of and for the year ended December 31, 2019. In the future, we may identify additional material weaknesses. In addition, if our independent registered public accounting firm attests to, and reports on, the management assessment of the effectiveness of our internal controls, our independent registered public accounting firm may disagree with our management’s assessment of the effectiveness of our internal controls.
Neither Microvast nor its independent registered public accounting firm undertook a comprehensive assessment of our internal control for purposes of identifying and reporting material weakness and other control deficiencies in its internal control over financial reporting. Had Microvast performed a formal assessment of its internal control over financial reporting or had its independent registered public accounting firm performed an audit of its internal control over financial reporting, additional deficiencies may have been identified. We continue to evaluate steps to remediate the material weaknesses. While we have processes to identify and appropriately apply applicable accounting requirements, we plan to enhance our system of evaluating and implementing the complex accounting standards that apply to our financial statements. Our plans at this time include hiring additional qualified accounting personnel, streamlining the reporting processes, developing compliance processes, and documenting key controls identified through risk assessments and walkthroughs.
The elements of our remediation plan can only be accomplished over time, and we can offer no assurance that these initiatives will ultimately have the intended effects. Following the identification of the material weakness, we have taken measures and plans to continue to take measures to remediate these control deficiencies. However, the implementation of these measures may not fully address the material weaknesses in our internal control over financial reporting, and we cannot conclude that they have been fully remediated. Our failure to correct the material weaknesses or our failure to discover and address any other deficiencies could result in inaccuracies in our financial statements and impair our ability to comply with applicable financial reporting requirements and related regulatory filings on a timely basis.
Changes in Internal Control Over Financial Reporting
As discussed elsewhere in this Report, we completed the Business Combination on July 23, 2021. Prior to the Business Combination, we have been a private company with limited accounting personnel and other resources with which to address our internal control and procedures over financial reporting.
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The Company’s operations prior to the Business Combination were materially different compared to the Company post-Business Combination. The design and implementation of internal control over financial reporting for the post-Business Combination Company has required and will continue to require significant time and resources from management and other personnel. In connection with the Business Combination consummated during the three months ended September 30, 2021, we began establishing standards and procedures at the acquired subsidiaries, controls over accounting systems and over the preparation of financial statements in accordance with generally accepted accounting principles to ensure that we have in place appropriate internal control over financial reporting at the acquired subsidiaries. We are continuing to integrate the acquired operations of each subsidiary into our overall internal control over financial reporting process.
We plan to implement a number of measures to address the material weaknesses that have been identified in connection with the audits of our consolidated financial statements as of and for the years ended December 31, 2018, 2019 and 2020 under PCAOB standards. We have hired and will continue to hire additional qualified financial and accounting staff with working experience of U.S. GAAP and SEC reporting requirements. We have established a comprehensive manual of accounting policies and procedures and have trained our accounting staff to follow these policies and procedures in order to allow early detection, prevention and correction of financial reporting errors. We have also done with risk assessments and evaluated entity level of controls and established a sub-certification process for SOX 302. To mitigate the deficiencies in IT general controls, we have implemented IT policies, implemented access right controls, rigorous password protection controls companywide. We will formally document internal control activities for 404(a) and 404(b) compliance. We intend to conduct regular and continuous U.S. GAAP accounting and financial reporting programs and send our financial staff to attend external U.S. GAAP training courses. We also intend to hire additional resources to strengthen the financial reporting function and set up a financial and system control framework. These changes to the Company’s internal control over financial reporting are reasonably likely to materially affect, the Company’s internal control over financial reporting.
As an emerging growth company, we may take advantage of an exemption from the auditor attestation requirement under Section 404 of the Sarbanes-Oxley Act of 2002 with respect to management’s assessment of our internal control over financial reporting.
Limitations on Effectiveness of Controls and Procedures
Our management, including our Chief Executive Officer and Chief Financial Officer, believes that our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their objectives and are effective at the reasonable assurance level. However, management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
From time to time we may be involved in various legal proceedings and subject to claims that arise in the ordinary course of business. Although the results of litigation and claims are inherently unpredictable and uncertain, we are not currently a party to any legal proceedings the outcome of which, if determined adversely to us, are believed to, either individually or taken together, have a material adverse effect on our business, operating results, cash flows or financial condition. However, the results of litigation and claims are inherently unpredictable. Regardless of the outcome, litigation has the potential to have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors. See Note 21 to the consolidated financial statements, which is incorporated in Item 1 by reference.
Item 1A. Risk Factors
As a result of the closing of the Business Combination on July 23, 2021, certain of the risk factors previously disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, may no longer apply. For risk factors relating to our business following the Business Combination, please refer to the section entitled “Risk Factors” in the Registration Statement on Form S-1 (File No. 333-258978), which was subsequently amended, filed on August 20, 2021, and as further amended, including the risk factors incorporated by reference therein. Any of these factors could result in a significant or material adverse effect on our results of operations or financial condition. Additional risk factors not presently known to us or that we currently deem immaterial may also impair our business or results of operations. We may disclose changes to such factors or disclose additional factors from time to time in our future filings with the SEC.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Information regarding all equity securities of the registrant sold by the Company during the period covered by this Report that were not registered under the Securities Act were included in a Current Report on Form 8-K filed by the Company, and therefore is not required to be furnished herein.
Item 3. Defaults upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
48
Item 6. Exhibits.
The following exhibits are furnished as part of, or incorporated by reference into, this Report on Form 10-Q.
| * | Filed herewith. |
| ** | Furnished. |
| + | Certain schedules to this Exhibit have been omitted in accordance with Item 601(b)(2) of Regulation S-K. The Company hereby agrees to hereby furnish supplementally a copy of all omitted schedules to the SEC upon request. |
49
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| Dated: November 15, 2021 | MICROVAST HOLDINGS, INC. | |
| By: | /s/ Yanzhuan Zheng | |
| Name: | Yanzhuan Zheng | |
| Title: | Chief Financial Officer | |
50
EXHIBIT 31.1
CERTIFICATION
PURSUANT TO RULES 13a-14(a) AND 15d-14(a)
UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Yang Wu, certify that:
| 1. | I have reviewed this Quarterly Report on Form 10-Q for the quarter ended September 30, 2021 of Microvast Holdings, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; and |
| c. | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d. | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting. |
| Date: November 15, 2021 | By: | /s/ Yang Wu | |
| Name: | Yang Wu | ||
| Title: | Chief Executive Officer and Director | ||
| (Principal Executive Officer) | |||
EXHIBIT 31.2
CERTIFICATION
PURSUANT TO RULES 13a-14(a) AND 15d-14(a)
UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Yanzhuan Zheng, certify that:
| 1. | I have reviewed this Quarterly Report on Form 10-Q for the quarter ended September 30, 2021 of Microvast Holdings, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; and |
| c. | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d. | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting. |
| Date: November 15, 2021 | By: | /s/ Yanzhuan Zheng | |
| Name: | Yanzhuan Zheng | ||
| Title: | Chief Financial Officer | ||
| (Principal Financial and Accounting Officer) | |||
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Microvast Holdings, Inc. (the “Company”) on Form 10-Q for the quarter ended September 30, 2021, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Yang Wu, Chief Executive Officer and Director, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
| (1) | the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
| (2) | the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Date: November 15, 2021
| /s/ Yang Wu | ||
| Name: | Yang Wu | |
| Title: | Chief Executive Officer and Director | |
| (Principal Executive Officer) | ||
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Microvast Holdings, Inc. (the “Company”) on Form 10-Q for the quarter ended September 30, 2021, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Yanzhuan Zheng, Chief Financial Officer, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
| (1) | the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
| (2) | the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Date: November 15, 2021
| /s/ Yanzhuan Zheng | ||
| Name: | Yanzhuan Zheng | |
| Title: | Chief Financial Officer | |
| (Principal Financial and Accounting Officer) | ||