SEC Filing – Microvast Holdings, Inc

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mvst-20220930

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2022

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to________________

Microvast Holdings, Inc.

(Exact name of registrant as specified in its charter)

Delaware

001-38826

83-2530757

(State or other jurisdiction
of incorporation or organization)

(Commission File Number)

(IRS Employer
Identification No.)


12603 Southwest Freeway, Suite 210 Stafford, Texas						77477
(Address Of Principal Executive Offices)						(Zip Code)

(281) 491-9505

(Registrant’s telephone number, including area code)


N/A
(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

Common stock, par value $0.0001 per share

MVST

The Nasdaq Stock Market LLC

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. Yes x No o

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). Yes x No o

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	o	Accelerated filer	o
Non-accelerated filer	x	Smaller reporting company	x
Emerging growth company	x

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. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

As of November 7, 2022, there were 309,292,067 shares of the Company’s common stock, par value $0.0001, issued and outstanding.

Table of Contents

MICROVAST HOLDINGS, INC.

FORM 10-Q

For the Quarter Ended September 30, 2022

Table of Contents


		Page
PART I. FINANCIAL INFORMATION		1

Item 1.	Financial Statements (Unaudited)	1

	Condensed Consolidated Balance Sheets	1

	Condensed Consolidated Statements of Operations	3

	Condensed Consolidated Statements of Comprehensive Loss	4

	Condensed Consolidated Statements of Changes in Shareholders’ (Deficit)/Equity	5

	Condensed Consolidated Statements of Cash Flows	7

	Notes to Unaudited Condensed Consolidated Financial Statements	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	40

Item 4.	Controls and Procedures	41

PART II. OTHER INFORMATION		42

Item 1.	Legal Proceedings	42

Item 1A.	Risk Factors	42

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds from Registered Securities	42

Item 3.	Defaults Upon Senior Securities	42

Item 4.	Mine Safety Disclosures	42

Item 5.	Other Information	42

Item 6.	Exhibits	43

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This report (“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, and future opportunities for us. 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 (the “PRC” or “China”);

•the impact of the ongoing COVID-19 pandemic;

•the conflict between Russia and Ukraine and any restrictive actions that have been or may be taken by the United States (the “U.S.”) and/or other countries in response thereto, such as sanctions or export controls;

•risks related to cybersecurity and data privacy;

•the impact of inflation and rising interest rates;

•changes in availability and price of raw materials;

•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;

•heightened awareness of environmental issues and concern about global warming and climate change;

•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 we may experience effects from global supply chain challenges, including delays in delivering our products to our customers;

•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; and

•the outcome of any legal proceedings that may be instituted against us or any of our directors or officers.

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 for the year ended December 31, 2021 in Part I, Item 1A and in the Registration Statement on Form S-3, (File No. 333-258978), which was initially filed on July 28, 2022, and as further amended.

Actual results, performance or achievements may differ materially, and potentially adversely, from any 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 forward-looking statements 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.

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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, 2021		September 30, 2022
Assets
Current assets:
Cash and cash equivalents	$	480,931	$	295,816
Restricted cash, current	55,178		83,179
Accounts receivable (net of allowance for credit losses of $5,005 and $5,436 as of December 31, 2021 and September 30, 2022, respectively)	88,717		82,707
Notes receivable	11,144		4,505
Inventories	53,424		82,262
Prepaid expenses and other current assets	17,127		19,060
Amount due from related parties	85		—
Total Current Assets	706,606		567,529
Restricted cash, non-current	—		36,704
Property, plant and equipment, net	253,057		286,346
Land use rights, net	14,008		12,328
Acquired intangible assets, net	1,882		1,696
Operating lease right-of-use assets	—		15,509
Other non-current assets	19,738		52,816
Total Assets	$	995,291	$	972,928

Liabilities
Current liabilities:
Accounts payable	$	40,408	$	35,972
Notes payable	60,953		72,811
Accrued expenses and other current liabilities	58,740		79,520
Advance from customers	1,526		6,589
Short-term bank borrowings	13,301		7,029
Income tax payables	666		655
Bonds payable-current	—		29,259
Total Current Liabilities	175,594		231,835
Long-term bonds payable	73,147		43,888
Long-term bank borrowings	—		37,956
Warrant liability	1,105		184
Share-based compensation liability	18,925		115

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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, 2021		September 30, 2022
Operating lease liabilities	—		13,530
Other non-current liabilities	39,822		29,564
Total Liabilities	$	308,593	$	357,072
Commitments and contingencies (Note 16)

Shareholders’ Equity
Common Stock (par value of US$0.0001 per share, 750,000,000 and 750,000,000 shares authorized as of December 31, 2021 and September 30, 2022; 300,530,516 and 309,292,067 shares issued, and 298,843,016 and 307,604,567 shares outstanding as of December 31, 2021 and September 30, 2022)	$	30	$	31
Additional paid-in capital	1,306,034		1,398,171
Statutory reserves	6,032		6,032
Accumulated deficit	(632,099)		(757,467)
Accumulated other comprehensive income/(loss)	6,701		(30,911)
Total Shareholders’ Equity	686,698		615,856
Total Liabilities and Shareholders’ Equity	$	995,291	$	972,928

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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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,
	2021		2022		2021		2022
Revenues	$	36,894	$	38,616	$	85,204	$	139,698
Cost of revenues	(72,779)		(36,623)		(129,100)		(132,851)
Gross (loss)/profit	(35,885)		1,993		(43,896)		6,847
Operating expenses:
General and administrative expenses	(57,058)		(22,585)		(67,810)		(83,021)
Research and development expenses	(13,518)		(11,457)		(23,199)		(33,010)
Selling and marketing expenses	(7,380)		(5,561)		(14,242)		(17,369)
Total operating expenses	(77,956)		(39,603)		(105,251)		(133,400)
Subsidy income	545		520		2,676		1,233
Loss from operations	(113,296)		(37,090)		(146,471)		(125,320)
Other income and expenses:
Interest income	97		870		304		1,604
Interest expense	(1,247)		(774)		(4,630)		(2,465)
Loss on changes in fair value of convertible notes	(3,018)		—		(9,861)		—
Gain on changes in fair value of warrant liability	1,113		101		1,113		921
Other (loss) income, net	(19)		349		25		758
Loss before provision for income taxes	(116,370)		(36,544)		(159,520)		(124,502)
Income tax expense	(106)		—		(324)		—
Net loss	$	(116,476)	$	(36,544)	$	(159,844)	$	(124,502)
Less: Accretion of Series C1 Preferred	251		—		2,257		—
Less: Accretion of Series C2 Preferred	570		—		5,132		—
Less: Accretion of Series D1 Preferred	1,190		—		10,708		—
Less: Accretion for noncontrolling interests	1,516		—		9,523		—
Net loss attributable to Common Stock shareholders of Microvast Holdings, Inc.	$	(120,003)	$	(36,544)	$	(187,464)	$	(124,502)
Net loss per share attributable to Common Stock shareholders of Microvast Holdings, Inc.
Basic and diluted	$	(0.49)	$	(0.12)	$	(1.27)	$	(0.41)
Weighted average shares used in calculating net loss per share of common stock
Basic and diluted	243,861,780		305,977,372		147,836,650		301,821,464

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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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,
	2021		2022		2021		2022
Net loss	$	(116,476)	$	(36,544)	$	(159,844)	$	(124,502)
Foreign currency translation adjustment	(3,130)		(21,002)		(2,373)		(37,612)
Comprehensive loss	$	(119,606)	$	(57,546)	$	(162,217)	$	(162,114)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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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, 2021
	Common Stock			Additional paid-in capital		Accumulated deficit		Accumulated other Comprehensive Income (loss)		Statutory reserves		Total Microvast Holdings, Inc. Shareholders’ (Deficit)/Equity
	Shares	Amount

Balance as of June 30, 2021	99,028,297	$	6	$	—	$	(465,457)	$	8,113	$	6,032	$	(451,306)
Net loss	—	—		—		(116,476)		—		—		(116,476)
Accretion for Series C1 Preferred	—	—		—		(251)		—		—		(251)
Accretion for Series C2 Preferred	—	—		—		(570)		—		—		(570)
Accretion for Series D1 Preferred	—	—		—		(1,190)		—		—		(1,190)
Accretion for redeemable noncontrolling interests	—	—		—		(658)		—		—		(658)
Accretion for the exiting noncontrolling interests	—	—		—		(858)		—		—		(858)
Issuance of common stock upon the reverse recapitalization, net of issuance costs of $42.8 million	191,254,950	23		1,241,648		—		—		—		1,241,671
Share-based compensation	8,551,647	1		49,551		—		—		—		49,552
Foreign currency translation adjustments	—	—		—		—		(3,130)		—		(3,130)
Balance as of September 30, 2021	298,834,894	$	30	$	1,291,199	$	(585,460)	$	4,983	$	6,032	$	716,784

	Nine Months Ended September 30, 2021
	Common Stock			Additional paid-in capital		Accumulated deficit		Accumulated other Comprehensive Income (loss)		Statutory reserves		Total Microvast Holdings, Inc. Shareholders’ (Deficit)/Equity
	Shares	Amount

Balance as of December 31, 2020	99,028,297	$	6	$	—	$	(397,996)	$	7,356	$	6,032	$	(384,602)
Net loss	—	—		—		(159,844)		—		—		(159,844)
Accretion for Series C1 Preferred	—	—		—		(2,257)		—		—		(2,257)
Accretion for Series C2 Preferred	—	—		—		(5,132)		—		—		(5,132)
Accretion for Series D1 Preferred	—	—		—		(10,708)		—		—		(10,708)
Accretion for redeemable noncontrolling interests	—	—		—		(5,841)		—		—		(5,841)
Accretion for the exiting noncontrolling interests	—	—		—		(3,682)		—		—		(3,682)
Issuance of common stock upon the reverse recapitalization, net of issuance costs of $42.8 million	191,254,950	23		1,241,648		—		—		—		1,241,671
Share-based compensation	8,551,647	1		49,551		—		—		—		49,552
Foreign currency translation adjustments	—	—		—		—		(2,373)		—		(2,373)
Balance as of September 30, 2021	298,834,894	$	30	$	1,291,199	$	(585,460)	$	4,983	$	6,032	$	716,784

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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, 2022
	Common Stock			Additional paid-in capital		Accumulated deficit		Accumulated other Comprehensive Income (loss)		Statutory reserves		Total Microvast Holdings, Inc. Shareholders’ Equity
	Shares	Amount

Balance as of June 30, 2022	300,859,266	$	30	$	1,378,774	$	(720,923)	$	(9,909)	$	6,032	$	654,004
Net loss	—	—		—		(36,544)		—		—		(36,544)
Issuance of common stock in connection with vesting of share-based awards	6,745,301	1		(1)		—		—		—		—
Share-based compensation	—	—		19,398		—		—		—		19,398
Foreign currency translation adjustments	—	—		—		—		(21,002)		—		(21,002)
Balance as of September 30, 2022	307,604,567	$	31	$	1,398,171	$	(757,467)	$	(30,911)	$	6,032	$	615,856

	Nine Months Ended September 30, 2022
	Common Stock			Additional paid-in capital		Accumulated deficit		Accumulated other Comprehensive Income (loss)		Statutory reserves		Total Microvast Holdings, Inc. Shareholders’ Equity
	Shares	Amount

Balance as of December 31, 2021	298,843,016	$	30	$	1,306,034	$	(632,099)	$	6,701	$	6,032	$	686,698
Net loss	—	—		—		(124,502)		—		—		(124,502)
Cumulative effect adjustment related to opening retained earnings for adoption of ASU2016-13, Financial instruments- Credit losses (Topic 326)	—	—		—		(866)		—		—		(866)
Issuance of common stock in connection with vesting of share-based awards	8,761,551	1		(1)		—		—		—		—
Share-based compensation	—			92,138		—		—		—		92,138
Foreign currency translation adjustments	—	—		—		—		(37,612)		—		(37,612)
Balance as of September 30, 2022	307,604,567	$	31	$	1,398,171	$	(757,467)	$	(30,911)	$	6,032	$	615,856

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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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,
	2021		2022
Cash flows from operating activities
Net loss	$	(159,844)	$	(124,502)
Adjustments to reconcile net loss to net cash used in operating activities:
Loss on disposal of property, plant and equipment	6		11
Depreciation of property, plant and equipment	14,398		15,161
Amortization of land use right and intangible assets	499		420
Noncash lease expenses	—		1,662
Share-based compensation	58,290		72,925
Changes in fair value of warrant liability	(1,113)		(921)
Changes in fair value of convertible notes	9,861		—
Allowance of credit losses	261		337
Provision for obsolete inventories	12,667		3,148
Impairment loss from property, plant and equipment	867		1,546
Product warranty	44,610		8,263
Changes in operating assets and liabilities:
Notes receivable	10,782		1,386
Accounts receivable	9,425		(5,024)
Inventories	(15,127)		(39,517)
Prepaid expenses and other current assets	(6,874)		(3,764)
Amount due from/to related parties	(128)		85
Operating lease right-of-use assets	—		(19,284)
Other non-current assets	52		216
Notes payable	6,868		19,942
Accounts payable	(5,944)		(529)
Advance from customers	(130)		5,608
Accrued expenses and other liabilities	(6,371)		(12,203)
Operating lease liabilities	—		15,389
Other non-current liabilities	2,292		1,050
Net cash used in operating activities	(24,653)		(58,595)

Cash flows from investing activities
Purchases of property, plant and equipment	(40,718)		(84,722)
Proceeds on disposal of property, plant and equipment	—		3
Net cash used in investing activities	(40,718)		(84,719)

Cash flows from financing activities
Proceeds from borrowings	26,603		58,708
Repayment of bank borrowings	(15,665)		(24,482)
Loans borrowing from related parties	8,426		—
Repayment of related party loans	(8,426)		—
Merger and Private Investment in Public Equity (“PIPE”) financing	747,791		—

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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,
	2021		2022
Payment for transaction fee in connection with the merger	(42,821)		—
Payment to exited noncontrolling interests	(139,038)		—
Issuance of convertible notes	57,500		—
Net cash generated from financing activities	634,370		34,226
Effect of exchange rate changes	2,314		(11,322)
Decrease in cash, cash equivalents and restricted cash	571,313		(120,410)
Cash, cash equivalents and restricted cash at beginning of the period	41,196		536,109
Cash, cash equivalents and restricted cash at end of the period	$	612,509	$	415,699


	Nine Months Ended September 30,
	2021		2022
Reconciliation to amounts on consolidated balance sheets
Cash and cash equivalents	$	572,609	$	295,816
Restricted cash	39,900		119,883
Total cash, cash equivalents and restricted cash	$	612,509	$	415,699

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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MICROVAST HOLDINGS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2022

(In thousands of U.S. dollars, except share and per share data, or as otherwise noted)

NOTE 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 Asia & Pacific region and Europe.

NOTE 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, 2021 included in the Company’s Annual Report on Form 10-K filed with the SEC on March 29, 2022, 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, 2022 are not necessarily indicative of the results to be expected for any subsequent quarter or for the fiscal year ending December 31, 2022.

The financial information as of December 31, 2021 included on the condensed consolidated balance sheets is derived from the Group’s audited consolidated financial statements for the year ended December 31, 2021.

Except for the adoption of ASU 2016-02, Leases (Topic 842) and ASU 2016-13, Financial Instruments — Credit Losses (Topic 326) on January 1, 2022, 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, 2021 and 2020 and for the years ended December 31, 2021, 2020, and 2019.

Significant accounting estimates reflected in the Group’s financial statements include allowance for credit losses, provision for obsolete inventories, impairment of long-lived assets, valuation allowance for deferred tax assets, product warranty, fair value measurement of warrant liability and share based compensation.

All intercompany transactions and balances have been eliminated upon consolidation.

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 “Business Combination,” and, collectively with the other transactions described in the Merger Agreement, the “Reverse Recapitalization”). As a result of the Business Combination, Tuscan was renamed “Microvast Holdings, Inc.”

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MICROVAST HOLDINGS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2022

(In thousands of U.S. dollars, except share and per share data, or as otherwise noted)

NOTE 2. SIGNIFICANT ACCOUNTING POLICIES - continued

Basis of presentation and use of estimates-continued

The Business Combination 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 Business Combination 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 Business Combination 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 Business Combination 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 Business Combination, have been retroactively restated as shares reflecting the Common Exchange Ratio (as defined below) established in the Business Combination Agreement.

Each of the options to purchase Microvast, Inc.’s common stock that was outstanding before the Business Combination 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”).

Emerging Growth Company

Pursuant to the JOBS Act, an emerging growth company (the “EGC”) 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-EGCs 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 EGCs pursuant to the JOBS Act so long as the Company qualifies as an EGC, 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-ion 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.

Disaggregation of revenue

For the three and nine months ended September 30, 2021 and 2022, the Group derived revenues from geographic regions as follows:

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MICROVAST HOLDINGS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2022

(In thousands of U.S. dollars, except share and per share data, or as otherwise noted)

NOTE 2. SIGNIFICANT ACCOUNTING POLICIES - continued

Revenue recognition-continued


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2022		2021		2022
People’s Republic of China ('PRC')	$	19,720	$	26,542	$	52,012	$	80,326
Other Asia & Pacific countries	12,072		7,394		21,348		45,420
Asia & Pacific	31,792		33,936		73,360		125,746
Europe	4,908		3,432		11,466		11,062
U.S.	194		1,248		378		2,890
Total	$	36,894	$	38,616	$	85,204	$	139,698

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 credit losses reflects the best estimate of probable losses inherent to the accounts receivable balance. Contract liabilities, recorded in advance from customers in the consolidated balance sheets, 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, 2021 and 2022, the Group recognized $60 and $722 of revenue previously included in advance from customers as of July 1, 2021 and July 1, 2022, respectively. During the nine months ended September 30, 2021 and 2022, the Group recognized $1,381 and $550 of revenue previously included in advance from customers as of January 1, 2021 and January 1, 2022, respectively, which consist of payments received in advance related to its sales of lithium batteries.

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 stock options and performance-based awards with a market condition, such as awards using total shareholder return (“TSR”) as a performance metric, 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.

Operating leases

On January 1, 2022, the Company adopted ASU No. 2016-02, Leases (Topic 842) (“ASC 842”), using the modified retrospective transition method resulting in the recording of operating lease right-of-use (ROU) assets of $18,826 and operating lease liabilities of $18,776 upon adoption. Prior period amounts have not been adjusted and continue to be reported in accordance with the previous accounting guidance. The adoption of the new guidance did not have a material effect on the unaudited condensed consolidated statements of operations. As of September 30, 2022, the Company recorded operating lease right-of-use (ROU) assets of $15,509 and operating lease liabilities of $15,432, including current portion in the amount of $1,902, which was recorded under accrued expenses and other current liabilities on the balance sheet.

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MICROVAST HOLDINGS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2022

(In thousands of U.S. dollars, except share and per share data, or as otherwise noted)

NOTE 2. SIGNIFICANT ACCOUNTING POLICIES - continued

Operating leases-continued

The Company determines if an arrangement is a lease or contains a lease at lease inception. Operating leases are required to record in the statement of financial position as right-of-use assets and lease liabilities, initially measured at the present value of the lease payments. The Company has elected the package of practical expedients, which allows the Company not to reassess (1) whether any expired or existing contracts as of the adoption date are or contain a lease, (2) lease classification for any expired or existing leases as of the adoption date and (3) initial direct costs for any expired or existing leases as of the adoption date. The Company also elected the practical expedient not to separate lease and non-lease components of contracts. Lastly, for lease assets other than real estate, such as printing machine and electronic appliances, the Company elected the short-term lease exemption as their lease terms are 12 months or less.

As the rate implicit in the lease is not readily determinable, the Company estimates its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The incremental borrowing rate is estimated in a portfolio approach to approximate the interest rate on a collateralized basis with similar terms and payments in a similar economic environment. Lease expense is recorded on a straight-line basis over the lease term.

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 in Note 10 – Warrants) 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 (as defined in Note 10 – Warrants).

Recent accounting pronouncements adopted

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The guidance supersedes existing guidance on accounting for leases with the main difference being that operating leases are to be recorded in the statement of financial position as right-of-use assets and lease liabilities, initially measured at the present value of the lease payments. For operating leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election not to recognize lease assets and liabilities. For public companies, the guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application of the guidance is permitted. In July 2018, ASU 2016-02 was updated with ASU 2018-11, Targeted Improvements to ASC 842, which provides entities with relief from the costs of implementing certain aspects of the new leasing standard. Specifically, under the amendments in ASU 2018-11, (1) entities may elect not to recast the comparative periods presented when transitioning to ASC 842 and (2) lessors may elect not to separate lease and non-lease components when certain conditions are met. Before ASU 2018-11 was issued, transition to the new lease standard required application of the new guidance at the beginning of the earliest comparative period presented in the financial statements.

As an EGC, the Company adopted this standard on January 1, 2022, and elected not to recast the comparative periods presented. The adoption did not have a material impact on the Company's unaudited condensed consolidated statements of operations or consolidated statements of cash flows, and the adoption of Topic 842 did not result in a cumulative-effect adjustment to retained earnings. Further information is disclosed in Note 12 – Leases.

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MICROVAST HOLDINGS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2022

(In thousands of U.S. dollars, except share and per share data, or as otherwise noted)

NOTE 2. SIGNIFICANT ACCOUNTING POLICIES - continued

Recent accounting pronouncements adopted-continued

In June 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses (Topic 326), which requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. As an EGC, the Company adopted this standard on January 1, 2022, using a modified retrospective transition method and did not restate the comparable periods, which resulted in a cumulative-effect adjustment to decrease the opening balance of retained earnings on January 1, 2022 by $866. The adoption did not have a material impact on the Company’s unaudited condensed consolidated financial statements.

Recent accounting pronouncements not yet adopted

In August 2020, the FASB issued ASU 2020-06, “Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40)-Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.” The ASU simplifies accounting for convertible instruments by removing major separation models required under current GAAP. Consequently, more convertible debt instruments will be reported as a single liability instrument with no separate accounting for embedded conversion features. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for it. The ASU also simplifies the diluted net income per share calculation in certain areas. For SEC filers, excluding smaller reporting companies, ASU 2020-06 is effective for fiscal years beginning after December 15, 2021 including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020. For all other entities, ASU 2020-06 is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. The Company is currently evaluating the impact that ASU 2020-06 may have on the condensed consolidated financial statements and related disclosures.

NOTE 3. ACCOUNTS RECEIVABLE

Accounts receivable consisted of the following:


	December 31, 2021		September 30, 2022
Accounts receivable	$	93,722	$	88,143
Allowance for credit losses	(5,005)		(5,436)
Accounts receivable, net	$	88,717	$	82,707

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MICROVAST HOLDINGS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2022

(In thousands of U.S. dollars, except share and per share data, or as otherwise noted)

NOTE 3. ACCOUNTS RECEIVABLE-continued

Movement of allowance for credit losses was as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2022		2021		2022
Balance at beginning of the period	$	4,743	$	5,828	$	5,047	$	5,005
Cumulative-effect adjustment upon adoption of ASU2016-13, Financial instruments- Credit losses (Topic 326)	—		—		—		866
Charges (Reversal) of expenses	457		(43)		261		337
Write off	(415)		(12)		(546)		(165)
Exchange difference	11		(337)		34		(607)
Balance at end of the period	$	4,796	$	5,436	$	4,796	$	5,436

NOTE 4. INVENTORIES

Inventories consisted of the following:


	December 31, 2021		September 30, 2022
Work in process	$	20,760	$	39,739
Raw materials	25,266		30,632
Finished goods	7,398		11,891
Total	$	53,424	$	82,262

Provision for obsolete inventories at $6,569 and $1,229 were recognized for the three months ended September 30, 2021 and 2022, respectively. Provision for obsolete inventories at $12,667 and $3,148 were recognized for the nine months ended September 30, 2021 and 2022, respectively.

NOTE 5. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES


	December 31, 2021		September 30, 2022
Product warranty, current	$	20,922	$	12,350
Payables for purchase of property, plant and equipment	18,500		38,044
Other current liabilities	10,636		11,753
Accrued payroll and welfare	3,476		3,863
Accrued expenses	2,444		3,894
Interest payable	1,836		1,919
Other tax payable	926		5,795
Operating lease liabilities, current	—		1,902
Total	$	58,740	$	79,520

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MICROVAST HOLDINGS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2022

(In thousands of U.S. dollars, except share and per share data, or as otherwise noted)

NOTE 6. PRODUCT WARRANTY

Movement of product warranty was as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2022		2021		2022
Balance at beginning of the period	$	25,543	$	43,703	$	19,356	$	58,458
Provided during the period	35,553		2,028		44,610		8,263
Utilized during the period	(9,229)		(4,357)		(12,099)		(22,957)
Exchange difference	—		(2,467)		—		(4,857)
Balance at end of the period	$	51,867	$	38,907	$	51,867	$	38,907


	December 31, 2021		September 30, 2022
Product warranty – current	$	20,922	$	12,350
Product warranty – non-current	37,536		26,557
Total	$	58,458	$	38,907

NOTE 7. BANK BORROWINGS

On September 27, 2022, the Group entered into a $111 million (RMB800 million) loan facilities agreement with a group of lenders led by a PRC Bank (the "2022 Facility Agreement"). The 2022 Facility Agreement has an effective drawdown period until June 9, 2023 and the interest rate is prime plus 115 basis points where prime is based on Loan Prime Rate published by the National Inter-bank Funding Center of the PRC. The interest is payable on a quarterly basis. The loan facilities can only be used for the construction project of manufacturing capacity expansion at the Group’s facility located in Huzhou, China. The 2022 Facility Agreement contains certain customary restrictive covenants, including but not limited to disposal of assets and dividend distribution without consent of the lender, and certain customary events of default.

The repayment schedule of the 2022 Facility Agreement is listed in the below table. As of September 30, 2022, the Group had outstanding borrowings of $42,173 under the 2022 Facility Agreement.


Repayment Date						Repayment Amount
June 10, 2023						$4.2 million (RMB30 million)
December 10, 2023						$9.8 million (RMB70 million)
June 10, 2024						$14.1 million (RMB100 million)
December 10, 2024						$14.1 million (RMB100 million)
June 10, 2025						$14.1 million (RMB100 million)
December 10, 2025						$14.1 million (RMB100 million)
June 10, 2026						$21.1 million (RMB150 million)
December 10, 2026						$21.1 million (RMB150 million)

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MICROVAST HOLDINGS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2022

(In thousands of U.S. dollars, except share and per share data, or as otherwise noted)

NOTE 7. BANK BORROWINGS-continued

The Group also entered into short-term loan agreements and bank facilities with Chinese banks. The original terms of the loans from Chinese banks are within 12 months and the interest rates range from 4.50% to 4.75% per annum.

Changes in bank borrowings are as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2022		2021		2022
Beginning balance	$	26,458	$	8,807	$	12,184	$	13,301
Proceeds from bank borrowings	—		45,242		26,603		58,708
Repayments of principal	(3,400)		(7,150)		(15,665)		(24,482)
Exchange difference	(207)		(1,914)		(271)		(2,542)
Ending balance	$	22,851	$	44,985	$	22,851	$	44,985


Balance of bank borrowings includes:	December 31, 2021		September 30, 2022
Current	$	13,301	$	7,029
Non-current	—		37,956
Total	$	13,301	$	44,985

Certain assets of the Group have been pledged to secure the above bank facilities granted to the Group. The aggregate carrying amount of the assets pledged by the Group as of December 31, 2021 and September 30, 2022 are as follows:


	December 31, 2021		September 30, 2022
Buildings	$	31,361	$	26,836
Machinery and equipment	7,376		—
Land use rights	4,470		12,328
Total	$	43,207	$	39,164

NOTE 8. OTHER NON-CURRENT LIABILITIES


	December 31, 2021		September 30, 2022
Product warranty - non-current	$	37,536	$	26,557