UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JuneSeptember 30, 2021
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from toto________________
Commission File No. 001-38826
Microvast Holdings, Inc.
(Exact name of registrant as specified in its charter)
| Delaware | 001-38826 | 83-2530757 | ||
| (State or other jurisdiction of | ( | (IRS Employer Identification No.) |
| 12603 Southwest Freeway, Suite 210 Stafford, Texas | ||
| (Address | (Zip Code) |
(281) 491-9505
(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 | ||
| 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 ☒ No ☐
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 ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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 | ☐ | |
| Non-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 August 16,November 12, 2021, there were 300,516,246300,522,394 shares of the Company’s common stock, par value $0.0001, issued and outstanding.
EXPLANATORY NOTE
On July 23, 2021 (the “Closing Date”), subsequent to the fiscal quarter ended June 30, 2021, the fiscal quarter to which this Quarterly Report on Form 10-Q (this “Report”) relates, 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., 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 Inc., a wholly owned subsidiary of Tuscan (“MVST SPV”), Tuscan, 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 6,736,111 shares of common stock upon conversion (the “Bridge Notes Conversion”) of the Bridge Notes, 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.”
Unless stated otherwise, this report contains information about Tuscan Holdings Corp. before the Business Combination. This Report covers a period prior to the closing of the Business Combination. As a result, references in this report to “we,” “us,” “our,” or the “Company” refer to the registrant prior to the closing of the Business Combination, unless the context requires otherwise.
Except as otherwise expressly provided herein, the information in this Report does not reflect the consummation of the Business Combination, which, as discussed above, occurred subsequent to the period covered hereunder.
TABLE OF CONTENTSMICROVAST 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
ITEMItem 1. FINANCIAL STATEMENTSFinancial Statements (Unaudited)
MICROVAST HOLDINGS, INC.
(f/k/a TUSCAN HOLDINGS CORP.)
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, | December 31, | |||||||
| (Unaudited) | (Audited) | |||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash | $ | 66,475 | $ | 135,961 | ||||
| Prepaid expenses and other current assets | 39,524 | 22,499 | ||||||
| Total Current Assets | 105,999 | 158,460 | ||||||
| Cash and marketable securities held in Trust Account | 281,671,994 | 282,254,978 | ||||||
| TOTAL ASSETS | $ | 281,777,993 | $ | 282,413,438 | ||||
| LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY | ||||||||
| Current liabilities | ||||||||
| Accounts payable and accrued expenses | $ | 801,468 | $ | 320,978 | ||||
| Income taxes payable | — | 302,547 | ||||||
| Advances from related party | — | 22,179 | ||||||
| Total Current Liabilities | 801,468 | 645,704 | ||||||
| Convertible promissory notes – related party | 1,686,000 | 200,000 | ||||||
| Warrant liability | 4,183,830 | 4,204,440 | ||||||
| Deferred tax liability | — | 21,468 | ||||||
| TOTAL LIABILITIES | 6,671,298 | 5,071,612 | ||||||
| Commitments | ||||||||
| Common stock subject to possible redemption, 27,583,510 and 26,675,733 as of June 30, 2021 and December 31, 2020, respectively | 281,581,276 | 272,341,820 | ||||||
| Stockholders’ (Deficit) Equity | ||||||||
| Preferred stock, $0.0001 par value; 1,000,000 shares authorized, none issued and outstanding | — | — | ||||||
| Common stock, $0.0001 par value; 65,000,000 shares authorized; 7,887,000 and 8,808,069 shares issued and outstanding (excluding 27,583,510 and 26,675,733 shares subject to possible redemption) as of June 30, 2021 and December 31, 2020, respectively | 789 | 881 | ||||||
| Additional paid in capital | — | 4,028,907 | ||||||
| (Accumulated deficit)/Retained earnings | (6,475,370 | ) | 970,218 | |||||
| Total Stockholders’ (Deficit) Equity | (6,474,581 | ) | 5,000,006 | |||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY | $ | 281,777,993 | $ | 282,413,438 | ||||
(In thousands of U.S. dollars, except share and per share data, or as otherwise noted)
The accompanying notes are an integral part of the condensed consolidated financial statements.
| December 31, 2020 | September 30, 2021 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 21,496 | $ | 572,609 | ||||
| Restricted cash | 19,700 | 39,900 | ||||||
| Accounts receivable (net of allowance for doubtful accounts of $5,047 and $4,796 as of December 31, 2020 and September 30, 2021, respectively) | 76,298 | 67,243 | ||||||
| Notes receivable | 20,839 | 10,260 | ||||||
| Inventories, net | 44,968 | 47,820 | ||||||
| Prepaid expenses and other current assets | 6,022 | 12,964 | ||||||
| Amount due from related parties | - | 128 | ||||||
| Total Current Assets | 189,323 | 750,924 | ||||||
| Property, plant and equipment, net | 198,017 | 222,771 | ||||||
| Land use rights, net | 14,001 | 13,935 | ||||||
| Acquired intangible assets, net | 2,279 | 2,024 | ||||||
| Other non-current assets | 890 | 702 | ||||||
| Total Assets | $ | 404,510 | $ | 990,356 | ||||
| Liabilities | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 42,007 | $ | 36,557 | ||||
| Advance from customers | 2,446 | 2,343 | ||||||
| Accrued expenses and other current liabilities | 60,628 | 48,065 | ||||||
| Income tax payables | 664 | 665 | ||||||
| Short-term bank borrowings | 12,184 | 22,851 | ||||||
| Notes payable | 35,782 | 43,131 | ||||||
| Bonds payable | 29,915 | - | ||||||
| Total Current Liabilities | 183,626 | 153,612 | ||||||
| Deposit liability for series B2 convertible preferred shares (“Series B2 Preferred”) | 21,792 | - | ||||||
| Long-term bonds payable | 73,147 | 73,147 | ||||||
| Warrant liability | - | 2,461 | ||||||
| Share-based compensation liability | - | 8,841 | ||||||
| Other non-current liabilities | 110,597 | 35,511 | ||||||
| Total Liabilities | $ | 389,162 | $ | 273,572 | ||||
1
MICROVAST HOLDINGS, INC.
(f/k/a TUSCAN HOLDINGS CORP.)UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS - continued
CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF OPERATIONS(In thousands of U.S. dollars, except share and per share data, or as otherwise noted)
Three Months Ended | Six Months Ended | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Operating and formation costs | $ | 543,914 | $ | 251,714 | $ | 1,434,843 | $ | 480,463 | ||||||||
| Loss from operations | (543,914 | ) | (251,714 | ) | (1,434,843 | ) | (480,463 | ) | ||||||||
| Other income (expense): | ||||||||||||||||
| Interest income earned on marketable securities held in Trust Account | 10,503 | 983,408 | 46,299 | 2,010,565 | ||||||||||||
| Unrealized gain (loss) on marketable securities held in Trust Account | (420 | ) | (938,273 | ) | — | 499,967 | ||||||||||
| Change in the fair value of convertible promissory notes – related party | (380,000 | ) | — | (736,000 | ) | — | ||||||||||
| Change in fair value of warrant liability | (1,119,810 | ) | (133,965 | ) | 20,610 | 3,435 | ||||||||||
| Other income (expense), net | (1,489,727 | ) | (88,830 | ) | (669,091 | ) | 2,513,967 | |||||||||
| Loss before income taxes | (2,033,641 | ) | (340,544 | ) | (2,103,934 | ) | 2,033,504 | |||||||||
| Benefit from (Provision for) income taxes | (16,954 | ) | 43,382 | 4,514 | (427,211 | ) | ||||||||||
| Net income (loss) | $ | (2,050,595 | ) | $ | (297,162 | ) | $ | (2,099,420 | ) | $ | 1,606,293 | |||||
| Basic and diluted weighted average shares outstanding, Common stock subject to possible redemption | 27,590,813 | 27,056,327 | 27,135,801 | 27,071,426 | ||||||||||||
| Basic and diluted net income per share, Common stock subject to possible redemption | $ | — | $ | — | $ | — | $ | 0.07 | ||||||||
| Basic and diluted weighted average shares outstanding, Non-redeemable common stock | 7,887,000 | 8,430,673 | 8,344,990 | 8,415,575 | ||||||||||||
| Basic net loss per common share, Non-redeemable common stock | $ | (0.26 | ) | $ | (0.04 | ) | $ | (0.25 | ) | $ | (0.04 | ) | ||||
| December 31, 2020 | September 30, 2021 | |||||||
| Mezzanine Equity (Note 14 and Note 16) | ||||||||
| Series C1 convertible redeemable preferred shares (“Series C1 Preferred”) (US$0.01 par value; 26,757,258 authorized, issued and outstanding as of December 31, 2020 and nil authorized, issued and outstanding as of September 30, 2021) | $ | 80,581 | $ | - | ||||
| Series C2 convertible redeemable preferred shares (“Series C2 Preferred”) (US$0.01 par value; 20,249,450 authorized, issued and outstanding as of December 31, 2020 and nil authorized, issued and outstanding as of September 30, 2021) | 81,966 | - | ||||||
| Series D1 convertible redeemable preferred shares (“Series D1 Preferred”) (US$0.01 par value; 22,311,516 authorized, issued and outstanding as of December 31, 2020 and nil authorized, issued and outstanding as of September 30, 2021) | 146,583 | - | ||||||
| Redeemable noncontrolling interests | 90,820 | - | ||||||
| Total Mezzanine Equity | $ | 399,950 | $ | - | ||||
| Commitments and contingencies (Note 21) | ||||||||
| Shareholders’ Equity | ||||||||
| Common Stock (par value of US$0.0001 per share, 240,450,000 and 750,000,000 shares authorized as of December 31, 2020 and September 30, 2021; 99,028,297 and 300,522,394 shares issued, and 99,028,297 and 298,834,894 shares outstanding as of December 31, 2020 and September 30, 2021) | $ | 6 | $ | 30 | ||||
| Additional paid-in capital | - | 1,291,199 | ||||||
| Statutory reserves | 6,032 | 6,032 | ||||||
| Accumulated deficit | (397,996 | ) | (585,460 | ) | ||||
| Accumulated other comprehensive income | 7,356 | 4,983 | ||||||
| Total Shareholders’ (Deficit)/Equity | (384,602 | ) | 716,784 | |||||
| Total Liabilities, Mezzanine Equity and Shareholders’ Equity | $ | 404,510 | $ | 990,356 | ||||
The accompanying notes are an integral part of thethese unaudited condensed consolidated financial statements.
2
MICROVAST HOLDINGS, INC.
(f/k/a TUSCAN HOLDINGS CORP.)
CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF CHANGES IN STOCKHOLDERS’ (DEFICIT) EQUITY
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2021
| Common Stock | Additional Paid-in | Retained Earnings/ (Accumulated | Total Equity | |||||||||||||||||
| Shares | Amount | Capital | Deficit) | (Deficit) | ||||||||||||||||
| Balance – January 1, 2021 | 8,808,069 | $ | 881 | $ | 4,028,907 | $ | 970,218 | $ | 5,000,006 | |||||||||||
| Change in value of common stock subject to possible redemption | (921,069 | ) | (92 | ) | (4,028,907 | ) | (5,393,414 | ) | (9,422,413 | ) | ||||||||||
| Net loss | — | — | — | (48,825 | ) | (48,825 | ) | |||||||||||||
| Balance – March 31, 2021 | 7,887,000 | $ | 789 | $ | — | $ | (4,472,021 | ) | $ | (4,471,232 | ) | |||||||||
| Change in value of common stock subject to possible redemption | — | — | — | 47,246 | 47,246 | |||||||||||||||
| Net loss | — | — | — | (2,050,595 | ) | (2,050,595 | ) | |||||||||||||
| Balance – June 30, 2021 | 7,887,000 | $ | 789 | $ | — | $ | (6,475,370 | ) | $ | (6,474,581 | ) | |||||||||
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2020
(Restated)
| Common Stock | Additional Paid-in | Retained | Total Stockholders’ | |||||||||||||||||
| Shares | Amount | Capital | Earnings | Equity | ||||||||||||||||
| Balance – January 1, 2020 | 8,400,476 | $ | 840 | $ | 1,605,302 | $ | 3,393,867 | $ | 5,000,009 | |||||||||||
| Change in value of common stock subject to possible redemption | 30,197 | 2 | (1,770,184 | ) | (133,280 | ) | (1,903,462 | ) | ||||||||||||
| Net income | — | — | — | 1,903,455 | 1,903,455 | |||||||||||||||
| Balance – March 31, 2020 | 8,430,673 | $ | 842 | $ | (164,882 | ) | $ | 5,164,042 | $ | 5,000,002 | ||||||||||
| Change in value of common stock subject to possible redemption | (3,481 | ) | 1 | 163,880 | 133,280 | 297,161 | ||||||||||||||
| Net loss | — | — | (297,162 | ) | (297,162 | ) | ||||||||||||||
| Balance – June 30, 2020 | 8,427,192 | $ | 843 | $ | (1,002 | ) | $ | 5,000,160 | $ | 5,000,001 | ||||||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
3
MICROVAST HOLDINGS, INC.UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(f/k/a TUSCAN HOLDINGS CORP.)In thousands of U.S. dollars, except share and per share data, or as otherwise noted)
CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF CASH FLOWS
| Six Months Ended June 30, | ||||||||
| 2021 | 2020 | |||||||
| (Restated) | ||||||||
| Cash Flows from Operating Activities: | ||||||||
| Net (loss) income | $ | (2,099,420 | ) | $ | 1,606,293 | |||
| Adjustments to reconcile net (loss) income to net cash used in operating activities: | ||||||||
| Change in fair value of warrant liability | (20,610 | ) | (3,435 | ) | ||||
| Change in fair value of convertible promissory notes – related party | 736,000 | — | ||||||
| Interest earned on marketable securities held in Trust Account | (46,299 | ) | (2,010,565 | ) | ||||
| Unrealized (gain) on marketable securities held in Trust Account | — | (499,967 | ) | |||||
| Deferred tax liability | (21,468 | ) | 77,924 | |||||
| Changes in operating assets and liabilities: | ||||||||
| Prepaid expenses and other current assets | (17,025 | ) | 30,086 | |||||
| Prepaid income taxes | — | 69,818 | ||||||
| Accounts payable and accrued expenses | 480,490 | (94,759 | ) | |||||
| Income taxes payable | (302,547 | ) | 279,469 | |||||
| Net cash used in operating activities | (1,290,879 | ) | (545,136 | ) | ||||
| Cash Flows from Investing Activities: | ||||||||
| Cash withdrawn from Trust Account for redemptions | 493,572 | — | ||||||
| Cash withdrawn from Trust Account to pay income taxes | 135,711 | 346,474 | ||||||
| Net cash provided by investing activities | 629,283 | 346,474 | ||||||
| Cash Flows from Financing Activities: | ||||||||
| Advances from related party | — | 2,833 | ||||||
| Redemption of common shares | (135,711 | ) | ||||||
| Repayment of advances from related party | (22,179 | ) | — | |||||
| Proceeds from convertible promissory notes – related party | 750,000 | 200,000 | ||||||
| Net cash provided by financing activities | 592,110 | 202,833 | ||||||
| Net Change in Cash | (69,486 | ) | 4,171 | |||||
| Cash – Beginning | 135,961 | 140,303 | ||||||
| Cash – Ending | $ | 66,475 | $ | 144,474 | ||||
| Supplemental cash flow information: | ||||||||
| Cash paid for income taxes | $ | 319,501 | $ | — | ||||
| Non-cash investing and financing activities: | ||||||||
| Change in value of common stock subject to possible redemption | $ | 9,103,745 | $ | 1,606,301 | ||||
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2020 | 2021 | 2020 | 2021 | |||||||||||||
| Revenues | $ | 30,753 | $ | 36,894 | $ | 59,400 | $ | 85,204 | ||||||||
| Cost of revenues | (27,075 | ) | (72,779 | ) | (50,950 | ) | (129,100 | ) | ||||||||
| Gross profit/(loss) | 3,678 | (35,885 | ) | 8,450 | (43,896 | ) | ||||||||||
| Operating expenses: | ||||||||||||||||
| General and administrative expenses | (4,721 | ) | (57,058 | ) | (12,670 | ) | (67,810 | ) | ||||||||
| Research and development expenses | (4,558 | ) | (13,518 | ) | (12,518 | ) | (23,199 | ) | ||||||||
| Selling and marketing expenses | (3,456 | ) | (7,380 | ) | (9,464 | ) | (14,242 | ) | ||||||||
| Total operating expenses | (12,735 | ) | (77,956 | ) | (34,652 | ) | (105,251 | ) | ||||||||
| Subsidy income | (39 | ) | 545 | 802 | 2,676 | |||||||||||
| Loss from operations | (9,096 | ) | (113,296 | ) | (25,400 | ) | (146,471 | ) | ||||||||
| Other income and expenses: | ||||||||||||||||
| Interest income | 66 | 97 | 502 | 304 | ||||||||||||
| Interest expense | (1,397 | ) | (1,247 | ) | (4,234 | ) | (4,630 | ) | ||||||||
| Loss on changes in fair value of convertible notes | - | (3,018 | ) | - | (9,861 | ) | ||||||||||
| Gain on change in fair value of warrant liability | - | 1,113 | - | 1,113 | ||||||||||||
| Other income (expense), net | 68 | (19 | ) | 63 | 25 | |||||||||||
| Loss before provision for income taxes | (10,359 | ) | (116,370 | ) | (29,069 | ) | (159,520 | ) | ||||||||
| Income tax benefit (expense) | 270 | (106 | ) | (5 | ) | (324 | ) | |||||||||
| Net loss | $ | (10,089 | ) | $ | (116,476 | ) | $ | (29,074 | ) | $ | (159,844 | ) | ||||
| Less: Accretion of Series C1 Preferred | 975 | 251 | 2,923 | 2,257 | ||||||||||||
| Less: Accretion of Series C2 Preferred | 2,216 | 570 | 6,650 | 5,132 | ||||||||||||
| Less: Accretion of Series D1 Preferred | 4,662 | 1,190 | 13,986 | 10,708 | ||||||||||||
| Less: Accretion for noncontrolling interests | 4,002 | 1,516 | 11,924 | 9,523 | ||||||||||||
| Net loss attributable to common stock shareholders of Microvast Holdings, Inc. | $ | (21,944 | ) | $ | (120,003 | ) | $ | (64,557 | ) | $ | (187,464 | ) | ||||
| Net loss per share attributable to common stock shareholders of Microvast Holdings, Inc. | ||||||||||||||||
| Basic and diluted | $ | (0.22 | ) | $ | (0.49 | ) | $ | (0.65 | ) | $ | (1.27 | ) | ||||
| Weighted average shares used in calculating net loss per share of common stock | ||||||||||||||||
| Basic and diluted | 99,028,297 | 243,861,780 | 99,028,297 | 147,836,650 | ||||||||||||
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 | $ | (10,089 | ) | $ | (116,476 | ) | $ | (29,074 | ) | $ | (159,844 | ) | ||||
| Foreign currency translation adjustment | 10,867 | (3,130 | ) | 6,223 | (2,373 | ) | ||||||||||
| Comprehensive income/(loss) | $ | 778 | $ | (119,606 | ) | $ | (22,851 | ) | $ | (162,217 | ) | |||||
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 | 99,028,297 | $ | 6 | $ | - | $ | (359,646 | ) | $ | (13,910 | ) | $ | 6,032 | $ | (367,518 | ) | ||||||||||||
| Net loss | - | - | - | (10,089 | ) | - | - | (10,089 | ) | |||||||||||||||||||
| Accretion for Series C1 Preferred | - | - | - | (975 | ) | - | - | (975 | ) | |||||||||||||||||||
| Accretion for Series C2 Preferred | - | - | - | (2,216 | ) | - | - | (2,216 | ) | |||||||||||||||||||
| Accretion for Series D1 Preferred | - | - | - | (4,662 | ) | - | - | (4,662 | ) | |||||||||||||||||||
| Accretion for the exiting noncontrolling interests | - | - | - | (1,425 | ) | - | - | (1,425 | ) | |||||||||||||||||||
| Foreign currency translation adjustments | - | - | - | - | 10,867 | - | 10,867 | |||||||||||||||||||||
| Accretion for redeemable noncontrolling interests | - | - | - | (2,577 | ) | - | - | (2,577 | ) | |||||||||||||||||||
| Balance as of September 30, 2020 | 99,028,297 | $ | 6 | $ | - | $ | (381,590 | ) | $ | (3,043 | ) | $ | 6,032 | $ | (378,595 | ) | ||||||||||||
| 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 | 99,028,297 | $ | 6 | $ | 3,727 | $ | (320,760 | ) | $ | (9,266 | ) | $ | 6,032 | $ | (320,261 | ) | ||||||||||||
| Net loss | - | - | - | (29,074 | ) | - | - | (29,074 | ) | |||||||||||||||||||
| Accretion for Series C1 Preferred | - | - | (2,923 | ) | - | - | - | (2,923 | ) | |||||||||||||||||||
| Accretion for Series C2 Preferred | - | - | (804 | ) | (5,846 | ) | - | - | (6,650 | ) | ||||||||||||||||||
| Accretion for Series D1 Preferred | - | - | - | (13,986 | ) | - | - | (13,986 | ) | |||||||||||||||||||
| Accretion for the exiting noncontrolling interests | - | - | - | (4,243 | ) | - | - | (4,243 | ) | |||||||||||||||||||
| Foreign currency translation adjustments | - | - | - | - | 6,223 | - | 6,223 | |||||||||||||||||||||
| Accretion for redeemable noncontrolling interests | - | - | - | (7,681) | - | - | (7,681 | ) | ||||||||||||||||||||
| Balance as of September 30, 2020 | 99,028,297 | $ | 6 | $ | - | $ | (381,590 | ) | $ | (3,043 | ) | $ | 6,032 | $ | (378,595 | ) | ||||||||||||
5
MICROVAST HOLDINGS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ (DEFICIT)/EQUITY - continued
(f/k/a TUSCANIn 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 | 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 (Note 3) | 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 | ||||||||||||||||||||||||||||
| 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 | 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 (Note 3) | 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 | ||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
6
MICROVAST HOLDINGS, CORP.)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 | $ | (29,074 | ) | $ | (159,844 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Loss on disposal of property, plant and equipment | 205 | 6 | ||||||
| Depreciation of property, plant and equipment | 11,384 | 14,398 | ||||||
| Amortization of land use right and intangible assets | 529 | 499 | ||||||
| Share-based compensation | - | 58,290 | ||||||
| Changes in fair value of warrant liability | - | (1,113 | ) | |||||
| Changes in fair value of convertible notes | - | 9,861 | ||||||
| (Reversal) allowance of doubtful accounts | (861 | ) | 261 | |||||
| Provision for obsolete inventories | 1,326 | 12,667 | ||||||
| Impairment loss from property, plant and equipment | 645 | 867 | ||||||
| Product warranty | 2,468 | 44,610 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Notes receivable | 10,630 | 10,782 | ||||||
| Accounts receivable | 11,782 | 9,425 | ||||||
| Inventories | 6,021 | (15,127 | ) | |||||
| Prepaid expenses and other current assets | (625 | ) | (6,874 | ) | ||||
| Amount due from/to related parties | 1,859 | (128 | ) | |||||
| Other non-current assets | (154 | ) | 52 | |||||
| Notes payable | (8,612 | ) | 6,868 | |||||
| Accounts payable | (2,545 | ) | (5,944 | ) | ||||
| Advance from customers | (1,165 | ) | (130 | ) | ||||
| Accrued expenses and other liabilities | 1,981 | (6,371 | ) | |||||
| Other non-current liabilities | - | 2,292 | ||||||
| Income tax payables | 5 | - | ||||||
| Net cash generated from/(used in) operating activities | 5,799 | (24,653 | ) | |||||
| Cash flows from investing activities | ||||||||
| Purchases of property, plant and equipment | (15,375 | ) | (40,718 | ) | ||||
| Proceeds on disposal of property, plant and equipment | 6 | - | ||||||
| Purchase of short-term investments | (2,002 | ) | - | |||||
| Proceeds from maturity of short-term investments | 2,946 | - | ||||||
| Net cash used in investing activities | (14,425 | ) | (40,718 | ) | ||||
| Cash flows from financing activities | ||||||||
| Proceeds from borrowings | 15,230 | 26,603 | ||||||
| Repayment of bank borrowings | (17,590 | ) | (15,665 | ) | ||||
| Loans borrowing from related parties | 18,063 | 8,426 | ||||||
| Repayment of related party loans | (18,063 | ) | (8,426 | ) | ||||
| Merger and Private Investment in Public Equity (“PIPE”) financing | - | 747,791 | ||||||
| Payment for transaction fee in connection with the merger | - | (42,821 | ) | |||||
| Payment to exited noncontrolling interests (Note 14) | - | (139,038 | ) | |||||
| Issuance of convertible notes | - | 57,500 | ||||||
| Net cash (used in)/generated from financing activities | (2,360 | ) | 634,370 | |||||
| Effect of exchange rate changes | 534 | 2,314 | ||||||
| (Decrease) Increase in cash, cash equivalents and restricted cash | (10,452 | ) | 571,313 | |||||
| Cash, cash equivalents and restricted cash at beginning of the period | 41,784 | 41,196 | ||||||
| Cash, cash equivalents and restricted cash at end of the period | $ | 31,332 | $ | 612,509 | ||||
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 | $ | 23,099 | $ | 572,609 | ||||
| Restricted cash | 8,233 | 39,900 | ||||||
| Total cash, cash equivalents and restricted cash | $ | 31,332 | $ | 612,509 | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
8
MICROVAST HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
JUNE
SEPTEMBER 30, 2021
(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., formerly known as Tuscan Holdings Corp. (the(“Microvast” or the “Company”), was a blank check company incorporated and its subsidiaries (collectively, the “Group”) are primarily engaged in Delaware on November 5, 2018. The Company was formeddeveloping, manufacturing, and selling electronic power products for electric vehicles primarily in the purposePeople’s Republic of entering into a merger, share exchange, asset acquisition, stock purchase, recapitalization, reorganization or similar business combination with one or more businesses or entities.China (“PRC”) and Europe.
2. SIGNIFICANT ACCOUNTING POLICIES
Business CombinationBasis 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”), Microvast Holdings, Inc. (formerly known as Tuscan Holdings Corp. (“Tuscan”), consummated the previously announced acquisition ofmerger with 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., Microvast, Inc. and TSCN Merger Sub Inc., a wholly owned subsidiary of the Company incorporated in Delaware on January 21, 2021corporation (“Merger Sub”), pursuant to which the Merger Sub merged with and into Microvast, Inc., with Microvast, Inc. surviving the merger (the “Merger”).
In connection“Merger,” and, collectively with the other transactions described in the Merger Agreement, Tuscan, MVST SPV Inc.,the “Reverse Recapitalization”). As a wholly owned subsidiary of Tuscan (“MVST SPV”), Tuscan, 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 6,736,111 shares of common stock upon conversion (the “Bridge Notes Conversion”) of the Bridge Notes, 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 Closingresult 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 CompanyTuscan 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”).
At Closing, pursuantPlease refer to the termsNote 3 “Reverse Recapitalization” for further details of the Merger Agreement, the Framework Agreement and subscription agreements entered into with the holders of the Bridge Notes and the PIPE Investors:
Pursuant to the Merger Agreement, the Microvast Holders and the MPS Investors will have the ability to earn, in the aggregate, an additional 20,000,000 shares of common stock (“Earn-Out Shares”) if the daily volume weighted average price of the common stock is greater than or equal to $18.00 for any 20 trading days within a 30 trading day period (or a change of control of the Company occurs that results in the holders of common stock receiving a per share price equal to or in excess of $18.00), during the period commencing on the Closing Date and ending on the third anniversary of the Closing Date.Merger.
Emerging Growth Company
5Pursuant 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.
MICROVAST HOLDINGS, INC.
(f/k/a TUSCAN HOLDINGS CORP.)
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
JUNE 30, 2021
Business Prior to the Business CombinationRevenue recognition
Prior to the Business Combination, the Company had one subsidiary, TSCN Merger Sub Inc., a wholly owned subsidiaryNature of the Company incorporated in Delaware on January 21, 2021 (see Note 6).Goods and Services
All activity through June 30, 2021 relatedThe 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 Company’s formation,customer, in an amount that reflects the initial public offering (the “Initial Public Offering”), which is described below, and identifying a target companyconsideration the Group expects to be entitled to in exchange for an initial business combination and consummating the acquisition of Microvast, Inc.goods or services.
The registration statement for the Company’s Initial Public Offering was declared effective on March 5, 2019. On March 7, 2019, the Company consummated the Initial Public Offering of 24,000,000 units (the “Units” and, with respect to the shares of common stock included in the Units sold, the “Public Shares”) at $10.00 per Unit, generating gross proceeds of $240,000,000, which is described in Note 3.
Simultaneously with the closing of the Initial Public Offering, the Company consummated the sale of 615,000 units (the “Private Units”) at a price of $10.00 per Private Unit in a private placement to Tuscan Holdings Acquisition LLC (the “Sponsor”) and EarlyBirdCapital, Inc. (“EarlyBirdCapital”) and its designee, generating gross proceeds of $6,150,000, which is described in Note 4.
Following the closing of the Initial Public Offering on March 7, 2019, an amount of $240,000,000 ($10.00 per Unit) from the net proceeds of the sale of the Units in the Initial Public Offering and the sale of the Private Units was placed in a trust account (“Trust Account”) which are invested in U.S. government securities, within the meaning set forth in Section 2(a)(16) of the Investment Company Act of 1940, as amended (the “Investment Company Act”), with a maturity of 180 days or less or in any open-ended investment company that holds itself out as a money market fund meeting the conditions of Rule 2a-7 of the Investment Company Act of 1940, as amended (the “Investment Company Act”), as determined by the Company, until the earlier of: (i) the completion of a Business Combination or (ii) the distribution of the Trust Account, as described below.
On March 12, 2019, the underwriters exercised their over-allotment option in full, resulting in the sale of an additional 3,600,000 Units for $36,000,000, less the underwriters’ discount of $720,000. In connection with the underwriters’ exercise of their over-allotment option, the Company also consummated the sale of an additional 72,000 Private Units at $10.00 per Private Unit, generating total gross proceeds of $720,000. A total of $36,000,000 was deposited into the Trust Account from the sale of the additional Units pursuant to the over-allotment option and the additional sale of Private Units, bringing the aggregate proceeds held in the Trust Account to $276,000,000.
Transaction costs amounted to $6,059,098, consisting of $5,520,000 of underwriting fees and $539,098 of other offering costs.
Risks and Uncertainties
Management continues to evaluate the impact of the COVID-19 pandemic and has concluded that while it is reasonably possible that the virus could have a negative effect on the Company’s financial position, results of its operations and/or search for a target company, the specific impact is not readily determinable as of the date of these financial statements. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Nasdaq Compliance
On January 6, 2021, the Company received a notice from the Listing Qualifications Department of The Nasdaq Stock Market stating that the Company failed to hold an Annual Meeting of stockholders within 12 months after its fiscal year ended December 31, 2019, as required by Nasdaq Listing Rule 5620(a). In accordance with Nasdaq Listing Rule 5810(c)(2)(G), the Company submitted a plan to regain compliance on February 4, 2021. Nasdaq accepted the plan and granted the Company an extension through June 29, 2021 to hold an annual meeting. Nasdaq’s decision is subject to certain conditions, including that the Company provide periodic updates with respect to its proposed business combination with Microvast. On April 28, 2021, the Company held an annual meeting of stockholders, in compliance with its plan.
On May 28, 2021, the Company received a notice from the Listing Qualifications Department of The Nasdaq Stock Market stating that because we failed to timely file our Quarterly Report on Form 10-Q for the quarter ended March 31, 2021, we were not in compliance with Nasdaq Listing Rule 5250(c)(1). The Company believes that compliance with the listing rule was regained on June 2, 2021 with the filing of the Company’s Form 10-Q for the quarter ended March 31, 2021.
610
MICROVAST HOLDINGS, INC.
(f/k/a TUSCAN HOLDINGS CORP.)NOTES TO UNAUDITED CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
JUNE
SEPTEMBER 30, 2021
(In thousands of U.S. dollars, except share and per share data, or as otherwise noted)
NOTE
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Disaggregation of revenue
BasisFor the three months ended September 30, 2020 and 2021, the Group derived revenues of Presentation$23,945 and $31,792 from the Asia & Pacific region, $6,446 and $4,908 from Europe and $362 and $194 from other geographic regions where the customers are located, respectively.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted inFor the United Statesnine months ended September 30, 2020 and 2021, the Group derived revenues of America (“GAAP”) for interim financial information$42,632 and in accordance with$73,360 from the instructions to Form 10-QAsia & Pacific region, $16,376 and Article 8 of Regulation S-X of$11,466 from Europe and $392 and $378 from other geographic regions where the SEC. Certain information or footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted, pursuant to the rules and regulations of the SEC for interim financial reporting. Accordingly, they do not include all the information and footnotes necessary for a complete presentation of financial position, results of operations, or cash flows. In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting of a normal recurring nature, whichcustomers are necessary for a fair presentation of the financial position, operating results and cash flows for the periods presented.located, respectively.
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 accompanying unaudited condensedallowance 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 financial statements should be readbalance sheet, represent payment received in conjunction withadvance 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 Company’s Annual Report on Form 10-Kthree months ended September 30, 2020 and Form 10-K/A for2021, the yearGroup recognized $13 and $60 of revenue previously included in advance from customers as of July 1, 2020 and July 1, 2021, respectively. During the nine months ended December 31,September 30, 2020 and 2021, the Group recognized $459 and $1,381 of revenue previously included in advance from customers as filed with the SEC on March 24, 2021of January 1, 2020 and JuneJanuary 1, 2021, respectively, which contain the audited financial statements and notes thereto. The interim results for the three and six months ended June 30, 2021 are not necessarily indicativeconsist of the resultspayments received in advance related to be expected for the year ending December 31, 2021 or for any future interim periods.its sales of lithium batteries.
Principles of ConsolidationShare-based compensation
The accompanying condensed consolidated financial statements includeShare-based payment transactions with employees are measured based on the accountsgrant date fair value of the Companyequity instrument and its wholly-owned subsidiary. All significant intercompany balances and transactions have been eliminatedrecognized as compensation expense on a straight-line basis over the requisite service period, with a corresponding impact reflected in consolidation.
Emerging Growth Company
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 an “emerging growth company,” as defined in Section 2(a)recognized on a straight-line basis over the estimated service period of the Securities Actaward, regardless of 1933,whether the market condition is satisfied. Forfeitures are recognized as amended (the “Securities Act”), as modified by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), and it may take advantage of certain exemptions from various reporting requirements thatthey occur. Liability-classified awards are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the independent registered public accounting firm attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in its periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.
Further, Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. The Company has elected not to opt out of such extended transition period which means that when a standard is issued or revised and it has different application dates for public or private companies, the Company, as an emerging growth company, can adopt the new or revised standardremeasured at the time private companies adopt the new or revised standard. This may make comparison of the Company’s financial statements with another public company which is neither an emerging growth company nor an emerging growth company which has opted out of using the extended transition period difficult or impossible because of the potential differences in accounting standards used.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.
Making estimates requires management to exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation or set of circumstances that existed at the date of the financial statements, which management considered in formulating its estimate, could change in the near term due to one or more future events. Accordingly, the actual results could differ significantly from those estimates.
Cash and Cash Equivalents
The Company considers all short-term investments with an original maturity of three months or less when purchased to be cash equivalents. The Company did not have any cash equivalentstheir fair-value-based measurement as of June 30, 2021 and December 31, 2020.each reporting date until settlement.
711
MICROVAST HOLDINGS, INC.
(f/k/a TUSCAN HOLDINGS CORP.)NOTES TO UNAUDITED CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
JUNE
SEPTEMBER 30, 2021
(In thousands of U.S. dollars, except share and per share data, or as otherwise noted)
Marketable Securities Held in Trust Account
2. SIGNIFICANT ACCOUNTING POLICIES - continued
At June 30, 2021 and December 31, 2020, the assets held in the Trust Account were substantially held in U.S. Treasury Bills. Through June 30, 2021, the Company withdrew approximately $2,079,000 of interest earned in the Trust Account to pay its franchise tax, income taxes and share redemptions, of which approximately $629,000 were withdrawn during the three and six months ended June 30, 2021.
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 at their fair value and adjusts the Private Warrants to fair value at each reporting period.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 for periods where no observable traded price was available are valued using a binomial latticeMonte Carlo simulation model. For periods subsequentmodel on the detachmentbasis of the Private Warrants from the Units, the Public Warrant quoted market price was used as the fair value as of each relevant date.Public Warrants.
3. REVERSE RECAPITALIZATION
Common Stock SubjectOn 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 Possible Redemption
The Company accounts for its common stock subject to possible redemption in accordancethe terms of the Merger Agreement, the Framework Agreement1 and subscription agreements entered into with the guidance in Accounting Standards Codification (“ASC”) Topic 480 “Distinguishing Liabilities from Equity.holders of an aggregate of $57.5 million outstanding convertible notes issued by Microvast (the “Bridge Notes,” Common stock subjectrefer to mandatory redemption is classified as a liability instrumentNote 11) and is measured at fair value. Conditionally redeemable common stock (including common stock that feature redemption rights that is either within the control of the holder or subject to redemption upon the occurrence of uncertain events not solely within the Company’s control) is classified as temporary equity. At all other times, common stock is classified as stockholders’ equity. The Company’s common stock features certain redemption rights that are considered to be outside of the Company’s control and subject to occurrence of uncertain future events. Accordingly, common stock subject to possible redemption is presented at redemption value as temporary equity, outside of the stockholders’ equity section of the Company’s condensed consolidated balance sheets.
The Company recognizes changes in redemption value immediately as they occur and adjusts the carrying value of redeemable common stock to equal the redemption value at the end of each reporting period. Increases or decreasesinvestors in the carrying amount of redeemable common stock are affected by charges against additional paid in capital and accumulated deficit.
Income Taxes
The Company follows the asset and liability method of accounting for income taxes under ASC 740, “Income Taxes.” Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statements carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that included the enactment date. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
ASC 740 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities. The Company recognizes accrued interest and penalties related to unrecognized tax benefits as income tax expense. There were no unrecognized tax benefits and no amounts accrued for interest and penalties as of June 30, 2021 and December 31, 2020. The Company is currently not aware of any issues under review that could result in significant payments, accruals or material deviation from its position. The Company is subject to income tax examinations by major taxing authorities since inception.
Net Income (Loss) Per Common Share
Net income (loss) per common share is computed by dividing net income (loss) by the weighted-average number of shares of common stock outstanding during the period.
The Company’s statements of operations include a presentation of income (loss) per share for common stock subject to possible redemption in a manner similar to the two-class method of income (loss) per share. Net income per common share, basic and diluted, for common stock subject to possible redemption is calculated by dividing the proportionate share of income on marketable securities held by the Trust Account, net of applicable franchise and income taxes, by the weighted average number of shares of common stock subject to possible redemption outstanding for the periods.
8
MICROVAST HOLDINGS, INC.
(f/k/a TUSCAN HOLDINGS CORP.)
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
JUNE 30, 2021
Net loss per common share, basic, for non-redeemable common stock is calculated by dividing the net income, adjusted for income on marketable securities attributable to Common Stock subject to possible redemption, by the weighted average number of non-redeemable common stock outstanding for the period. Net loss per common share, diluted, for non-redeemable common stock is calculated by dividing the non-redeemable net income, adjusted for the change in the fair value of the warrant liability, by the weighted average number of non-redeemable common stock outstanding for the periods, including the effects of any potentially dilutive securities. Diluted loss per common share gives effect to all dilutive potential of shares of common stock outstanding during the period, including warrants, using the treasury stock method. Diluted loss per common share excludes all dilutive potential of shares of common stock if their effect is anti-dilutive.
Non-redeemable common stock includes Founder Shares and non-redeemable shares of common stock as these shares do not have any redemption features. Non-redeemable common stock participates in the income on marketable securities based on non-redeemable common stock shares’ proportionate interest.
Three Months Ended | Six Months Ended June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Common stock subject to possible redemption | ||||||||||||||||
| Numerator: Earnings allocable to common stock subject to possible redemption | ||||||||||||||||
| Interest earned on marketable securities held in Trust Account | $ | 10,503 | $ | 965,018 | $ | 46,299 | $ | 1,974,174 | ||||||||
| Unrealized gain on marketable securities held in Trust Account | (420 | ) | (920,727 | ) | — | 490,918 | ||||||||||
| Less: Company’s portion available to pay taxes | (10,083 | ) | (6,494 | ) | (46,299 | ) | (517,668 | ) | ||||||||
| Net earnings allocable to common stock subject to possible redemption | $ | — | $ | 37,797 | $ | — | $ | 1,947,424 | ||||||||
| Denominator: Weighted average common stock subject to possible redemption | ||||||||||||||||
| Basic and diluted weighted average shares outstanding | 27,590,813 | 27,056,327 | 27,135,801 | 27,071,426 | ||||||||||||
| Basic and diluted net income per common share | $ | — | $ | — | $ | — | $ | 0.07 | ||||||||
| Non-Redeemable Common Stock | ||||||||||||||||
| Basic Loss per Share | ||||||||||||||||
| Numerator Net (Loss) Income minus Net Earnings | ||||||||||||||||
| Net (loss) income | $ | (2,050,595 | ) | $ | (297,162 | ) | $ | (2,099,420 | ) | $ | 1,606,293 | |||||
| Less: Net earnings allocable to common stock subject to possible redemption | — | (38,988 | ) | — | (1,947,424 | ) | ||||||||||
| Non-Redeemable Net Loss – Basic | $ | (2,050,595 | ) | $ | (336,150 | ) | $ | (2,099,420 | ) | $ | (341,131 | ) | ||||
| Denominator: Weighted Average Non-Redeemable Common Stock | ||||||||||||||||
| Basic and diluted weighted average shares outstanding | 7,887,000 | 8,430,673 | 8,344,990 | 8,415,575 | ||||||||||||
| Basic and diluted net loss per common share | $ | (0.26 | ) | $ | (0.04 | ) | $ | (0.25 | ) | $ | (0.04 | ) | ||||
9
MICROVAST HOLDINGS, INC.
(f/k/a TUSCAN HOLDINGS CORP.)
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
JUNE 30, 2021
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist of a cash account in a financial institution which, at times may exceed the Federal Depository Insurance Coverage of $250,000. The Company has not experienced losses on this account and management believes the Company is not exposed to significant risks on such account.
Fair Value of Financial Instruments
The fair value of the Company’s assets and liabilities, which qualify as financial instruments under ASC 820, “Fair Value Measurement,” approximates the carrying amounts represented in the accompanying condensed consolidated balance sheets, primarily due to their short-term nature, except for the Private Warrants (see Note 9).
Fair Value Measurements
Fair value is defined as the price that would be received for sale of an asset or paid for transfer of a liability, in an orderly transaction between market participants at the measurement date. GAAP establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). These tiers include:PIPE Financing:
| ● |
| ● |
| ● | ||
| ● | The Company issued 150,000 private placement units to Tuscan Holdings Acquisition LLC (the “Sponsor”) upon conversion of notes payable by the Company in |
In some circumstances,Pursuant to the inputs usedMerger Agreement, the former owners of Microvast (“Microvast Holders”) and the MPS minority investors will have the ability to measure fair value might be categorized within different levels of the fair value hierarchy. In those instances, the fair value measurement is categorized in its entiretyearn, in the fair value hierarchy based on the lowest level input that is significant to the fair value measurement.
Derivative Financial Instruments
The Company evaluates its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives in accordance with ASC Topic 815, “Derivatives and Hedging”. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value on the grant date and is then re-valued at each reporting date, with changes in the fair value reported in the statements of operations. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement or conversion of the instrument could be required within 12 months of the balance sheet date.
Recently Adopted Accounting Standards
In August 2020, the FASB issued ASU No. 2020-06, “Debt—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” (“ASU 2020-06”), which simplifies accounting for convertible instruments by removing major separation models required under current GAAP. ASU 2020-06 removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception and it also simplifies the diluted earnings per share calculation in certain areas. ASU 2020-06 is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years, with early adoption permitted. The Company adopted ASU 2020-06 effective as of January 1, 2021. The adoption of ASU 2020-06 did not have an impact on the Company’s financial statements.
Management does not believe that any other recently issued, but not yet effective, accounting standards, if currently adopted, would have a material effect on the Company’s condensed financial statements.
10
MICROVAST HOLDINGS, INC.
(f/k/a TUSCAN HOLDINGS CORP.)
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
JUNE 30, 2021
NOTE 3. INITIAL PUBLIC OFFERING
On March 7, 2019, the Company consummated the Initial Public Offering and sold 24,000,000 units at a price of $10.00 per Unit. Each Unit consists of one share of common stock and one warrant (“Public Warrant”). On March 12, 2019, in connection with the underwriters’ exercise of the over-allotment option in full, the Company soldaggregate, an additional 3,600,000 Units at a price of $10.00 per Unit. Each Public Warrant entitles the holder to purchase one share of common stock at a price of $11.50 per share, subject to adjustment (see Note 7).
NOTE 4. PRIVATE PLACEMENT
Simultaneously with the closing of the Initial Public Offering, the Sponsor and EarlyBirdCapital and its designee purchased an aggregate of 615,000 Private Units at a price of $10.00 per Private Unit, for an aggregate purchase price of $6,150,000. The Sponsor purchased 500,047 Private Units and EarlyBirdCapital and its designee purchased an aggregate of 114,953 Private Units. On March 12, 2019, in connection with the underwriters’ exercise of the over-allotment option in full, the purchasers purchased an aggregate of an additional 72,000 additional Private Units, of which 58,542 Private Units were purchased by the Sponsor and 13,458 Private Units were purchased by EarlyBirdCapital and its designee, for an aggregate purchase price of $720,000. Each Private Unit consists of one share of common stock (“Private Share”) and one warrant (“Private Warrant”). Each Private Warrant is exercisable to purchase one share of common stock at an exercise price of $11.50 per share, subject to adjustment (see Note 7). The proceeds from the Private Units were added to the proceeds from the Initial Public Offering held in the Trust Account. If the Company does not complete a Business Combination within the Combination Period, the proceeds from the sale of the Private Units will be used to fund the redemption of the Public Shares (subject to the requirements of applicable law), and the Private Units and all underlying securities will be worthless.
NOTE 5. RELATED PARTY TRANSACTIONS
Founder Shares
In November 2018, the Sponsor purchased 5,750,000 shares (the “Founder Shares”) of the Company’s common stock for an aggregate price of $25,000. On March 5, 2019, the Company effected a stock dividend of 0.219,999,988 shares of common stock for each outstanding share (the “Stock Dividend”Common Stock (“Earn-Out Shares”), resulting in 6,900,000 Founder Shares being issued and outstanding.
The 6,900,000 Founder Shares included an aggregate of up to 900,000 shares subject to forfeiture by if the Sponsor to the extent that the underwriters’ over-allotment was not exercised in full or in part, so that the holders of the Founder Shares would collectively own 20% of the Company’s issued and outstanding shares after the Initial Public Offering (assuming the holders did not purchase any Public Shares in the Initial Public Offering and excluding the Private Units and Representative Shares (see Note 7). In connection with the underwriters’ exercise of the over-allotment option in full on March 12, 2019, 900,000 Founder Shares are no longer subject to forfeiture.
11
MICROVAST HOLDINGS, INC.
(f/k/a TUSCAN HOLDINGS CORP.)
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
JUNE 30, 2021
The holders of the Founder Shares have agreed, subject to certain limited exceptions, not to transfer, assign or sell any of the Founder Shares until, with respect to 50% of the Founder Shares, the earlier of one year after the consummation of a Business Combination and the date on which the closingdaily volume weighted average price of the common stock equalsCommon Stock is greater than or exceeds $12.50 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like)equal to $18.00 for any 20 trading days within a 30-trading30 trading day period (or a change of control of the Company occurs that results in the holders of Common Stock receiving a per share price equal to or in excess of $18.00), during the period commencing after a Business Combinationon the Closing Date and ending on the third anniversary of the Closing Date. In accordance with respectASC 815-40, the Earn-Out Shares were indexed to the remaining 50% of the Founder Shares, until the one year after the consummation of a Business Combination, or earlier, in either case, if, subsequent to a Business Combination, the Company completes a liquidation, merger, stock exchange or other similar transaction which results in all of the Company’s stockholders having the right to exchange their shares of common stock for cash, securities or other property.Common Stock and were classified as equity.
Administrative Service FeeEach 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.
Vogel Partners, LLP, an affiliate of Mr. Vogel, has agreed that, until the earlier of the consummation of an initial business combination or the Company’s liquidation, it will make available to the Company certain general and administrative services, including office space, utilities, and administrative support, as the Company may require from time to time. The Company has agreed to pay Vogel Partners, LLP $10,000 per month for these services. For the three and six months ended June 30, 2021 and 2020, the Company incurred $30,000 and $60,000, respectively, in fees for these services. At June 30, 2021 and December 31, 2020, fees amounting to $10,000 are included in accounts payable and accrued expenses in the accompanying condensed consolidated balance sheets.
| 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, (1) the CL Investors waived their convertible loans issued on November 2, 2018, by MPS, in exchange for 6,719,845 shares of Common Stock of the Company and (2) the MPS minority investors waived their rights in MPS's equity in exchange for 17,253,182 shares of Common Stock of the Company (refer to Note 14). |
Related Party Loans
In addition, in order to finance transaction costs in connection with a Business Combination, the Sponsor or certain of the Company’s officers and directors or their affiliates may, but are not obligated to, loan the Company funds as may be required (“Working Capital Loans”). If the Company completes a Business Combination, the Company would repay the Working Capital Loans out of the proceeds of the Trust Account released to the Company. Otherwise, the Working Capital Loans would be repaid only out of funds held outside the Trust Account to the extent such funds are available. In the event that a Business Combination does not close, the Company may use a portion of proceeds held outside the Trust Account to repay the Working Capital Loans, but no proceeds held in the Trust Account will be used to repay the Working Capital Loans. The Working Capital Loans would either be repaid upon consummation of a Business Combination, without interest, or, at the lender’s discretion, up to $1,500,000 of such Working Capital Loans may be convertible into units of the post Business Combination entity at a price of $10.00 per unit. The units would be identical to the Private Units.
On April 21, 2020, the Company issued an unsecured promissory note to the Sponsor in the aggregate amount of $300,000 (the “Note”), of which $200,000 was drawn upon on such date. On February 12, 2021, the Company issued an unsecured promissory note to the Sponsor in the aggregate amount of $1,200,000 (together, with the Note, the “Convertible Promissory Notes”). The Convertible Promissory Notes are non-interest bearing and payable upon the consummation of a Business Combination. The Convertible Promissory Notes are convertible, at the lender’s option, into units of the post Business Combination entity at a price of $10.00 per unit. The units would be identical to the Private Units.
As of June 30, 2021 and December 31, 2020, the aggregate fair market value of the Convertible Promissory Notes was $1,686,000 and $200,000 (see Note 9).
12
MICROVAST HOLDINGS, INC.
(f/k/a TUSCAN HOLDINGS CORP.)NOTES TO UNAUDITED CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTSJUNESEPTEMBER 30, 2021
(In thousands of U.S. dollars, except share and per share data, or as otherwise noted)
NOTE 6. COMMITMENTS
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.
Registration RightsAs of the Closing Date and Lock-Up Agreementfollowing the completion of the Merger, the ownership interests of the Company’s stockholders were as follows:
| Shares | ||||
| Existing Microvast Equity Holders(a) | 209,999,991 | |||
| Existing Microvast Convertible Noteholders | 6,736,106 | |||
| Tuscan public stockholders | 27,493,140 | |||
| Sponsor Group(b)(c) | 7,608,589 | |||
| EarlyBirdCapital | 428,411 | |||
| PIPE investors immediately after Merger | 48,250,000 | |||
| Common Stock | 300,516,237 | |||
| (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 1,687,500 shares that may be subject to cancellation in accordance with the amended escrow agreement. |
Pursuant toThe Merger is accounted for as a registration rights agreement entered intoreverse recapitalization under U.S. GAAP. This determination is primarily based on March 7, 2019, the holders of the Founder Shares, Representative Shares, Private Units, and any units that may be issued upon conversion of Working Capital Loans (and all underlying securities) are entitled to registration rights. The holders of the majority of these securities are entitled to make up to two demands that the Company register such securities. The holders of the(1) Microvast, Inc.’s stockholders comprising a relative majority of the Founder Shares can electvoting power of the Company and having the ability to exercise these registration rights at any time commencing three monthsnominate the members of the Board, (2) Microvast, Inc.’s operations prior to the date on whichacquisition comprising the Founder Shares are to be released from escrow. The holdersonly ongoing operations of the Company, and (3) Microvast, Inc.’s senior management comprising a majority of the Representative Shares, Private Unitssenior 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 units issued in payment of working capital loans madeother intangible assets recorded and are consolidated with Microvast Inc.’s financial statements on the Closing Date. Operations prior to the Company (or underlying securities) can electMerger are presented as those of Microvast, Inc. The shares and net loss per share available to exercise these registration rights at any time commencing afterholders of the Company consummates a Business Combination. Notwithstanding anythingCompany’s Common Stock, prior to the contrary, EarlyBirdCapital and its designee may only make a demand on one occasion and only duringMerger, have been retroactively restated as shares reflecting the five-year period beginning onCommon Exchange Ratio established in the effective date of the Initial Public Offering. Merger Agreement.
In addition, the holders have certain “piggy-back” registration rights with respect to registration statements filed subsequent to the consummation of a Business Combination; provided, however, that EarlyBirdCapital and its designee may participate in a “piggy-back” registration only during the seven-year period beginning on the effective date of the Initial Public Offering. The Company will bear the expenses incurred in connection with the filing of any such registration statements.At the Closing of the Business Combination, the parties agreed to terminate this registration rights agreement and replace it with the Registration Rights and Lock-Up Agreement (the “Registration Rights and Lockup Agreement”).
At the Closing,Merger, the Company entered into a Registration Rights and Lock-Up Agreement withraised approximately $708.4 million of proceeds including the contribution of $281.7 million of cash held in Tuscan’s trust account from its initial public offering, net of redemptions of Tuscan public stockholders of Microvast prior to the consummation$0.9 million, and $482.5 million of the Business Combination, the affiliates of certain former investors in Microvast’s subsidiary Microvast Power System (Houzhou) Co. Ltd., the Sponsor and certain officers and directors of the Company, pursuant to which the Company is obligated to file a registration statement promptly following the Closing to register the resale of certain securities of the Company held by the parties to the Registration Rights and Lock-Up Agreement. The Registration Rights and Lock-Up Agreement provides the parties thereto with “piggy-back” registration rights, subject to certain requirements and customary conditions. There are no cash penalties under the Registration Rights and Lock-Up Agreement for failure to timely file a required registration statement.
Subject to certain exceptions, the Registration Rights and Lock-Up Agreement further provides (1) Wu will be subject to a lock-up of one year post closing with respect to 25% of his shares of common stock and a lock-up of two years for the remaining 75% of his shares of common stock, provided that, with respect to the 25% of his shares subject to the one-year lock-up, he can sell those shares if the shares trade at $15.00 or above for 20 days in any 30-day period, (2) the Microvast equity holders other than Wu are subject to a six-month lock-up post closing, and (3) with respect to the shares of common stock owned by the Sponsor, Stefan M. Selig, Richard O. Rieger, and Amy Butte (collectively, the “Sponsor Group”), such shares shall be subject to the transfer restrictions provided in the Amendment to Escrow Agreement described below.
Business Combination Marketing Agreement
The Company has engaged EarlyBirdCapital as an advisor in connection with a Business Combination to assist the Company in holding meetings with its shareholders to discuss the potential Business Combination and the target business’ attributes, introduce the Company to potential investors that are interested in purchasing the Company’s securities in connection with a Business Combination, assist the Company in obtaining shareholder approval for the Business Combination and assist the Company with its press releases and public filings in connection with the Business Combination. The Company will pay EarlyBirdCapital a cash fee for such services upon the consummation of a Business Combination in an amount equal to $9,660,000 (exclusive of any applicable finders’ fees which might become payable); provided that up to 30% of the fee may be allocated at the Company’s sole discretion to other FINRA members that assist the Company in identifying and consummating a Business Combination.
Engagement of Morgan Stanley
The Company has engaged Morgan Stanley & Co. LLC (“Morgan Stanley”) to provide financial advisory services in connection with the Microvast business combination (see below), and, upon consummation of the transaction with Microvast, the Company will pay Morgan Stanley a transaction fee of $5.5 million, plus expenses. Morgan Stanley also acted as placement agent in connection with the PIPE Financing (see below),financing. The total transaction costs was $58.3 million, consisting of banking, legal, and other professional fees, among which $42.8 million was recorded as a reduction to additional paid-in-capital and the Company is obligatedremaining $15.5 million was recorded as expense by Tuscan immediately prior to pay Morgan Stanley a placement fee equal to (i) 3.5% of the sum of (x) the aggregate gross proceeds raised in the PIPE Financing up to $300 million (not including funds from the sale of certain excluded securities) and (y) any borrowings pursuant to a bridge financing provided inmerger.
In connection with the proposed business combinationMerger, the Sponsor and related parties entered into the amended escrow agreement, pursuant to which 1,687,500 shares owned by investors introduced by Morgan Stanley,the Sponsor Group (“Escrow Shares”) are subject to cancellation on conditions that: (i) 50% of 1,687,500 shares shall be cancelled if the last sale price of the Common Stock does not equal or exceed $12.00 per share for any 20 trading days within any 30-trading day period prior to the fifth anniversary of the Closing, and (ii) 2.5%50% of 1,687,500 shares shall be cancelled if the last sale price of the aggregate gross proceeds raised inCommon Stock does not equal or exceed $15.00 per share for any 20 trading days within any 30-trading day period prior to the PIPE Financing above $300 million.
fifth anniversary of the Closing. In accordance with ASC 815-40, the Escrow Shares were indexed to the Common Stock and were classified as equity.
13
MICROVAST HOLDINGS, INC.
(f/k/a TUSCAN HOLDINGS CORP.)NOTES TO UNAUDITED CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTSJUNESEPTEMBER 30, 2021
(In thousands of U.S. dollars, except share and per share data, or as otherwise noted)
Stockholders Agreement
4. ACCOUNTS RECEIVABLE
At the Closing, the Company, Mr. Yang Wu (“Wu”) and Tuscan Holdings Acquisition LLC, a Delaware limited liability company (the “Sponsor”), entered into a Stockholders Agreement (the “Stockholders Agreement”), which provides that immediately following the Closing, the board of directorsAccounts receivable consisted of the Company (the “boardfollowing:”) shall consist of: (i) Wu, who is the initial Chairman of the board (who is also the Chief Executive Officer of the Company); (ii) Yanzhuan Zheng (who is also the Chief Financial Officer of the Company); (iii) Stanley Whittingham; (iv) Arthur Wong; (v) Craig Webster; (vi) Stephen Vogel; and (vii) Wei Ying. The Stockholders Agreement also provides that the Company’s amended and restated certificate of incorporation (the “Charter”) shall provide that (a) the number of directors which shall constitute the board shall be fixed by and in the manner provided in the Bylaws, except that any increase or decrease in the number of directors shall require the affirmative vote of the Wu Directors (as defined below), and (b) the board shall be divided into three classes designated Class I, Class II and Class III, as follows:
| December 31, 2020 | September 30, 2021 | |||||||
| Accounts receivable | $ | 81,345 | $ | 72,039 | ||||
| Allowance for doubtful accounts | (5,047 | ) | (4,796 | ) | ||||
| Accounts receivable, net | $ | 76,298 | $ | 67,243 | ||||
Wu has the right, but not the obligation, to nominateMovement of allowance for election to the board at every meeting of the stockholders of the Company at which directors are elected a number of individuals (rounded up to the nearest whole number) equal to (a) the total number of directors, multiplied by (b) the quotient obtained by dividing the shares of common stock beneficially owned by Wu by the total number of outstanding shares of common stock (each, a “Wu Director”) less the number of Wu Directors then serving on the board and whose terms in office are not expiring at such meeting. Wu, Yanzhuan Zheng, Stanley Whittingham and Arthur Wong were nominated by Wudoubtful accounts was as the initial Wu Directors.follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2020 | 2021 | 2020 | 2021 | |||||||||||||
| Balance at beginning of the period | $ | 4,534 | $ | 4,743 | $ | 5,537 | $ | 5,047 | ||||||||
| Charge to expenses | 2 | 457 | (861 | ) | 261 | |||||||||||
| Write off | - | (415 | ) | - | (546 | ) | ||||||||||
| Exchange difference | 173 | 11 | 33 | 34 | ||||||||||||
| Balance at end of the period | $ | 4,709 | $ | 4,796 | $ | 4,709 | $ | 4,796 | ||||||||
5. INVENTORIES, NET
So long as the Sponsor beneficially owns at least 5,481,441 shares of common stock, the Sponsor shall have the right, but not the obligation, to nominate for election to the board at every meetingInventories consisted of the stockholders of the Company at which directors are elected, one individual (the “Sponsor Directorfollowing:”) less the number of Sponsor Directors then serving on the board and whose terms in office are not expiring at such meeting. Stephen Vogel was nominated by the Sponsor as the initial Sponsor Director.
Indemnity Agreements
| December 31, 2020 | September 30, 2021 | |||||||
| Work in process | $ | 22,167 | $ | 18,222 | ||||
| Raw materials | 17,451 | 20,725 | ||||||
| Finished goods | 5,350 | 8,873 | ||||||
| Total | $ | 44,968 | $ | 47,820 | ||||
OnProvision for obsolete inventories at $680 and $6,569 were recognized for the Closing Date, we entered into indemnity agreements with Wu, Yanzhuan Zheng, Craig Webster, Wei Ying, Stanley Whittingham, Arthur Wongthree months ended September 30, 2020 and Stephen Vogel, each of whom became a director following2021, respectively. Provision for obsolete inventory at $1,326 and $12,667 were recognized for the Business Combination,nine months ended September 30, 2020 and Wenjuan Mattis, Ph.D., Shane Smith, Shengxian Wu, Ph.D. Sascha Rene Kelterborn, Sarah Alexander and Lu Gao each of who became executive officers of the Company following the Business Combination. Each indemnity agreement provides that, subject to limited exceptions, and among other things, we will indemnify the director or executive officer to the fullest extent permitted by law for claims arising in his or her capacity as our director or officer.
2021, respectively.
Amendment to Escrow Agreement
At the Closing, the Sponsor and related parties entered into an amendment to the Escrow Agreement pursuant to which the 6,750,000 shares held by Tuscan Holdings Acquisition LLC (“Sponsor”), and the 30,000 shares held by each of Stefan M. Selig, Richard O. Rieger and Amy Butte (together with the Sponsor, the “Founders”) are being held post-Closing. Pursuant to the amended Escrow Agreement:
14
MICROVAST HOLDINGS, INC.
(f/k/a TUSCAN HOLDINGS CORP.)NOTES TO UNAUDITED CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTSJUNESEPTEMBER 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
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
NOTE
7. STOCKHOLDERS’ EQUITYACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
| December 31, 2020 | September 30, 2021 | |||||||
| Payables to exiting investors | $ | 30,000 | $ | - | ||||
| Payables for purchase of property, plant and equipment | 15,122 | 13,017 | ||||||
| Product warranty | 4,296 | 18,690 | ||||||
| Other current liabilities | 3,959 | 8,469 | ||||||
| Accrued payroll and welfare | 2,704 | 2,818 | ||||||
| Interest payable | 1,379 | 2,674 | ||||||
| Accrued expenses | 1,696 | 1,972 | ||||||
| Other tax payable | 1,472 | 425 | ||||||
| Total | $ | 60,628 | $ | 48,065 | ||||
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.
Preferred Stock —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 | $ | 17,358 | $ | 25,543 | $ | 18,416 | $ | 19,356 | ||||||||
| Provided for new sales during the period | 1,517 | 1,498 | 2,468 | 3,761 | ||||||||||||
| Provided for pre-existing legacy product | - | 34,055 | - | 40,849 | ||||||||||||
| Utilized during the period | (313 | ) | (9,229 | ) | (2,322 | ) | (12,099 | ) | ||||||||
| Balance at end of the period | $ | 18,562 | $ | 51,867 | $ | 18,562 | $ | 51,867 | ||||||||
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 $34.1 million for such legacy product sold. As the component was not incorporated into other products, no additional accrual was made to other existing products sold. The Company is authorized to issue 1,000,000 shares of preferred stock with a par value of $0.0001 per share with such designation, rights and preferences as may be determined from time to time by the Company’s board of directors. As of June 30, 2021 and December 31, 2020, there were no shares of preferred stock issued or outstanding.
Common Stock — The Company is authorized to issue 65,000,000 shares of common stock with a par value of $0.0001 per share. Holders of the common stock are entitled to one vote for each share. As of June 30, 2021 and December 31, 2020, there were 7,887,000 and 8,808,069 shares of common stock issued and outstanding, excluding 27,583,510 and 26,675,733 shares of common stock subject to possible redemption, respectively.
The Company determined the common stock subject to redemption to be equal to the redemption value of approximately $10.21 per share of common stock while also taking into consideration a redemption cannot result in net tangible assets being less than $5,000,001. Upon considering the impact of the PIPE Financing and associated Subscription Agreements, it was concluded that the redemption value should include all shares of common stock Public Shares resulting in the common stock subject to possible redemption being equal to $281,581,276. This resulted in a measurement adjustment to the initial carrying value of the common stock subject to redemptionnegotiation with the offset recorded to additional paid-in capitalsupplier for compensation and accumulated deficit.
Representative Shares
In November 2018, the Company issued to the designees of EarlyBirdCapital, for a nominal consideration, 300,000 shares (after giving effect to the Stock Dividend) of common stock (the “Representative Shares”). The Company accounted for the Representative Shares as an offering cost of the Initial Public Offering, with a corresponding credit to stockholders’ equity. The Company estimated the fair value of Representative Shares to be $1,200 based upon the price of the Founder Shares issued to the Sponsor. The holders of the Representative Shares have agreed not to transfer, assign or sell any such shares until the completion of a Business Combination. In addition, the holders have agreed (i) to waive their redemption rights (or to sell any shares in a tender offer) with respect to such shares in connection with the completion of a Business Combination and (ii) to waive their rights to liquidating distributions from the Trust Account with respect to such shareswill take legal action if the Company fails to complete a Business Combination within the Combination Period.
NOTE 8. WARRANTS
The Public Warrants will become exercisable 30 days after the completion of a Business Combination. No warrants will be exercisable for cash unless the Company has an effective and current registration statement covering the shares of common stock issuable upon exercise of the warrants and a current prospectus relating to such shares of common stock. Notwithstanding the foregoing, if a registration statement covering the shares of common stock issuable upon exercise of the public warrants is not effective within 90 days following the consummation of a Business Combination, warrant holders may, until such time as there is an effective registration statement and during any period when the Company shall have failed to maintain an effective registration statement, exercise warrants on a cashless basis pursuant to the exemption provided by Section 3(a)(9) of the Securities Act, provided that such exemption is available. If that exemption, or another exemption, is not available, holders will not be able to exercise their warrants on a cashless basis. The Public Warrants will expire five years after the completion of a Business Combination or earlier upon redemption or liquidation.necessary.
15
MICROVAST HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(f/k/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 | $ | 4,296 | $ | 18,690 | ||||
| Product warranty – non-current | 15,060 | 33,177 | ||||||
| Total | $ | 19,356 | $ | 51,867 | ||||
9. BANK BORROWINGS
The Group entered into loan agreements and bank facilities with Chinese banks and a TUSCANGerman bank.
The original terms of the loans from Chinese banks range from 6 to 12 months and the interest rates range from 5.00% to 6.00% per annum. As of September 30, 2021, the balance of the loans from Chinese bank was $13,191.
The bank facility agreement with the German bank includes a $13.0 million (EUR11 million) 8-year maturity term loan and a $4.7 million (EUR4 million) revolving facility (“German Bank Facility Agreement”). The interest rate of the 8-year maturity term loan is EURIBOR plus a margin rate determined by the financial leverage ratio of the Group. The $4.7 million (EUR4 million) revolving facility at 6.00% annual interest, needs to be renewed every year (60 days in advance). During the nine months ended September 30, 2021, the Group drew down the 8-year maturity term loan to the amount of $9,660. On October 1, 2021, the Company had entered into the termination agreement with the German Bank to cancel the German Bank Facility Agreement. All outstanding amounts under the loan were repaid on October 8, 2021.
Changes in bank borrowings are as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2020 | 2021 | 2020 | 2021 | |||||||||||||
| Beginning balance | $ | 9,412 | $ | 26,458 | $ | 11,922 | $ | 12,184 | ||||||||
| Proceeds from bank borrowings | 5,757 | - | 15,230 | 26,603 | ||||||||||||
| Repayments of principal | (5,696 | ) | (3,400 | ) | (17,590 | ) | (15,665 | ) | ||||||||
| Exchange difference | 321 | (207 | ) | 232 | (271 | ) | ||||||||||
| Ending balance | $ | 9,794 | $ | 22,851 | $ | 9,794 | $ | 22,851 | ||||||||
All balance of bank borrowings as of September 30, 2021 and December 31, 2020 are current borrowings.
16
MICROVAST HOLDINGS, CORP.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 | $ | 22,732 | $ | 31,479 | ||||
| Machinery and equipment | 19,297 | 17,173 | ||||||
| Land use rights | 2,789 | 4,448 | ||||||
| Total | $ | 44,818 | $ | 53,100 | ||||
In addition, the Group’s related parties Ochem Chemical Co., Ltd (“Ochem”) and Ochemate Material Technologies Co., Ltd (“Ochemate”) provided $20,874 of guarantees to secure certain bank facilities granted to the Group as of December 31, 2020.
10. OTHER NON-CURRENT LIABILITIES
| December 31, 2020 | September 30, 2021 | |||||||
| Payable to exiting investors | $ | 94,316 | $ | - | ||||
| Product warranty - non-current | 15,060 | 33,177 | ||||||
| Deferred subsidy income- non-current | 1,221 | 2,334 | ||||||
| Total | $ | 110,597 | $ | 35,511 | ||||
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 | $ | 29,915 | $ | - | ||||
| Total | $ | 29,915 | $ | - | ||||
| Long–term bonds payable | ||||||||
| Huzhou Saiyuan | $ | 73,147 | $ | 73,147 | ||||
| Total | $ | 73,147 | $ | 73,147 | ||||
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 $87,776 (RMB600 million), of which $29,259 (RMB200 million) was converted from the existing non-interest-bearing loan with Huzhou Saiyuan as of December 31, 2018. The Company pledged its 12.39% equity holding over MPS to Huzhou Saiyuan to facilitate the issuance of convertible bonds. Besides the previous converted bond $29,259 (RMB200 million), Huzhou Saiyuan further subscribed for $14,629 (RMB100 million) on January 9, 2019 and $29,259 (RMB200 million) on February 1, 2019, respectively.
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 | ||||
| February 1, 2019 | $29,259 (RMB200 million) | June 30, 2023 | $29,259 (RMB200 million) | 3%~4% | ||||
| December 31, 2018 | $29,259 (RMB200 million) | April 28, 2024 | $14,629 (RMB100 million) | 0%~4% | ||||
| July 11, 2024 | $7,315 (RMB50 million) | 0%~4% | ||||||
| October 1, 2024 | $7,315 (RMB50 million) | 0%~4% | ||||||
| January 1, 2020 | $14,629 (RMB100 million) | April 13, 2026 | $14,629 (RMB100 million) | 3%~4% |
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 $73,147 (RMB500 million).
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 $58,516 (RMB400 million) or up to $73,147 (RMB500 million) to MPS, and the CL Investors could convert the bonds into a number of Series D2 preferred shares of the Company (the “Series D2 Preferred”) once approvals from the PRC and US government were obtained. As of December 31, 2020, $29,915 (RMB204.5 million) was subscribed by the CL Investors.
On July 23, 2021, upon the completion of the Merger between Microvast, Inc. and Tuscan, the convertible bonds were settled and converted into 6,719,845 shares of Common Stock of the combined company. Refer to Note 3.
Convertible Notes at Fair Value (the “Bridge Notes”)
On January 4, 2021, the Company entered into a note purchase agreement to issue $57,500 convertible promissory notes to certain investors, fully due and payable on the third anniversary of the initial closing date. The notes bore no interest, provided, however, if a liquidity event (“Liquidity Event”) had not occurred prior to June 30, 2022, an interest rate of 6% would be applied retrospectively from the date of initial closing. The conversion of the promissory notes was contingent upon the occurrence of a Private Investment in Public Equity (“PIPE”) financing, a Liquidity Event or a new financing after June 30, 2022 but before the maturity date (“Next Financing”). The first tranche and second tranche of the convertible promissory notes were issued in January 2021 and February 2021 at amounts of $25,000 and $32,500, respectively. A discounted rate of 80% or 90% was required to be applied upon conversion, depending on the circumstances of PIPE financing, Liquidity Event or Next Financing.
18
MICROVAST HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTSJUNESEPTEMBER 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 $3,018 and $9,861 were recorded in the unaudited condensed consolidated statements of operations for the three and nine months ended September 30, 2021, respectively.
On July 23, 2021, upon the completion of the Merger between Microvast, Inc. and Tuscan, the convertible promissory notes were converted into 6,736,106 shares of Common Stock of the combined company as disclosed in Note 3.
12. WARRANTS
The Company assumed 27,600,000 publicly-traded warrants (“Public Warrants”) and 837,000 private placement warrants issued to the Sponsor and EarlyBirdCapital, Inc. (“EarlyBirdCapital”) (“Private Warrants” and together with the Public Warrants, the “Warrants”) upon the Merger, all of which were issued in connection with Tuscan’s initial public offering (other than 150,000 Private Warrants that were issued in connection with the closing of the Merger) and entitle the holder to purchase one share of the Company’s Common Stock at an exercise price of $11.50 per share. During the three and nine months ended September 30, 2021, none of Public Warrants and Private Warrants were exercised.
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 five years after the completion of the Merger or earlier upon redemption or liquidation.
Once the Public Warrants becomebecame 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 |
| ● |
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 “cashless basis,” as described in the warrant agreement.net-share settlement basis.
The Private Warrants are identical to the Public Warrants, underlying the Units sold in the Initial Public Offering, except that the Private Warrants will be exercisable for cash or on a cashlessnet-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 five years from the effective date of the Initial Public Offering.Merger.
The exercise price and number of shares of common stockCommon Stock issuable upon exercise of the warrantsWarrants may be adjusted in certain circumstances including in the event of a stock dividend, or recapitalization, reorganization, merger or consolidation. However, the warrantsWarrants will not be adjusted for issuance of common stockCommon Stock at a price below its exercise price. Additionally, in no event will the Company be required to net cash settle the warrants. If the Company is unable to completeWarrants.
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 Business Combination within the Combination Periodliability on July 23, 2021 at a fair value of $3,574 and the Company liquidatesprivate warrant liability was remeasured to fair value based upon the funds heldmarket price as of September 30, 2021, resulting in a gain of $1.1 million for the three months ended September 30, 2021, classified within change in fair value of warrant liabilities in the Trust Account, holderscondensed consolidated statements of warrants will not receive any of such funds with respect to their warrants, nor will they receive any distribution from the Company’s assets held outside of the Trust Account with the respect to such warrants. Accordingly, the warrants may expire worthless.operations.
In addition, if (x)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 | $ | 10.00 | $ | 8.22 | ||||
| Exercise price | $ | 11.50 | $ | 11.50 | ||||
| Expected term (years) | 5.00 | 4.82 | ||||||
| Volatility | 54.14 | % | 52.80 | % | ||||
| Risk-free interest rate | 0.72 | % | 0.94 | % | ||||
| Dividend rate | 0.00 | % | 0.00 | % | ||||
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 issues additionalbased 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 | $ | 21,496 | - | - | $ | 21,496 | ||||||||||
| Restricted cash | 19,700 | - | - | 19,700 | ||||||||||||
| Total | $ | 41,196 | - | - | $ | 41,196 | ||||||||||
| 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 | $ | 572,609 | - | - | $ | 572,609 | ||||||||||
| Restricted cash | 39,900 | - | - | 39,900 | ||||||||||||
| Total financial asset | $ | 612,509 | - | - | $ | 612,509 | ||||||||||
| Warrant liability | $ | - | - | 2,461 | $ | 2,461 | ||||||||||
| Total financial liability | $ | - | - | 2,461 | $ | 2,461 | ||||||||||
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 | 57,500 | |||
| Changes in fair value of convertible notes | 9,861 | |||
| Conversion as of Merger | (67,361 | ) | ||
| 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 | 3,574 | |||
| Changes in fair value | (1,113 | ) | ||
| Balance as of September 30, 2021 | $ | 2,461 | ||
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 17.39% equity interest of its wholly-owned subsidiary, MPS, to eight third-party investors (the “Investors”) for total cash consideration of $400,000, which was received in 2017.
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 14.05% equity interests in MPS (“Exiting Investors”), at a redemption value equal to the initial capital contribution plus 6.00% simple annual interest. To facilitate the repurchase and redemption transaction, MPS and the Exiting Investors entered into certain property mortgage agreements on May 30, 2018.
Pursuant to an extension agreement signed in September 2020, $30,000 was paid to the Exiting Investors in March 2021, and the remaining repayments are scheduled in 2023 and thereafter, depending on the completion of financing in 2022 or 2023. On August 31, 2021, an early repayment agreement was entered into between MPS and the Exiting Investors, pursuant to which the remaining amount of $99,038 was fully repaid as of September 30, 2021 to the Exiting Investors.
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 17,253,182 shares of Common Stock of the combined company as disclosed in Note 3.
15. COMMON STOCK
The Company has authorized 800,000,000 shares to be issued at $0.0001 par value, with 750,000,000 shares designated as Common Stock and 50,000,000 shares of redeemable convertible preferred stock.
Immediately following the Merger, there were 300,516,237 shares of Common Stock issued with a par value of $0.0001 as disclosed in Note 3. The holder of each share of Common Stock is entitled to one vote. The Company has retroactively adjusted the shares issued and outstanding prior to July 23, 2021 to give effect to the Common Exchange Ratio of 160.3 established in the Merger Agreement. As of September 30, 2021, there were 300,522,394 shares of Common Stock issued and 298,834,894 shares outstanding.
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 160.3 established in the Merger as described in Note 3):
| Preferred Shares | Number of Shares | Shareholders | ||||
| Series C1 Preferred | 26,757,258 | Ashmore Global Special Situations Fund 4 Limited Partnership and Ashmore Global Special Situations Fund 5 Limited Partnership (“Ashmore”) and International Finance Corporation (“IFC”) | ||||
| Series C2 Preferred | 20,249,450 | Ashmore Cayman SPC Limited (“Ashmore Cayman”) and IFC | ||||
| Series D1 Preferred | 22,311,516 | Evergreen Ever Limited (“EEL”) | ||||
| Total | 69,318,224 | |||||
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 160.3 as disclosed in Note 3.
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 | $ | 76,684 | $ | 73,100 | $ | 127,935 | $ | 80,561 | ||||||||
| Accretion | 2,923 | 6,650 | 13,986 | 7,681 | ||||||||||||
| Ending balance as of September 30, 2020 | $ | 79,607 | $ | 79,750 | $ | 141,921 | $ | 88,242 | ||||||||
| Balance as of January 1, 2021 | $ | 80,581 | $ | 81,966 | $ | 146,583 | $ | 90,820 | ||||||||
| Accretion from January 1 to July 23 | 2,257 | 5,132 | 10,708 | �� | 5,841 | |||||||||||
| Conversion as of Merger | (82,838 | ) | (87,098 | ) | (157,291 | ) | (96,661 | ) | ||||||||
| 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 17 percent of the total issued and outstanding company shares on a fully-diluted basis. The share options, non-vested shares and non-vested share units granted to the employees or equity-linked securities for capital raising purposesnonemployees shall vest and become non-forfeitable with respect to one-third of the total number of the non-vested share and non-vested share units immediately upon the occurrence of initial public offering, sale or transfer of all or substantially all of the business, operations or assets of Microvast, Inc. or its subsidiaries, taken as a whole, to a third party, or such other sale or transfer of common stock in Microvast, Inc. as determined, in each case, by Microvast, Inc. pursuant to legal documents and other obligations binding upon it (the “Initial Vesting Date”), and on each of the first and second anniversaries of the Initial Vesting Date; provided that through each applicable vesting date, the employee or nonemployee is employed. The Merger in 2021 did not constitute the satisfaction of a performance condition that would trigger the vesting of equity awards as stipulated in the 2012 Plan.
In connection with the closingMerger, all outstanding share awards granted under the 2012 Plan, 209,906 options and 143,652 capped non-vested share units, were converted into 33,647,927 options and 23,027,399 capped non-vested share units of the Company, respectively, using the Common Exchange Ratio of 160.3 as described in Note 3. Upon conversion, the Company modified the terms of the equity awards by removing the performance condition of the occurrence of an initial Business Combination at an issue price or effective issue pricepublic offering and similar transaction under the 2012 Plan, and adopted a new vesting schedule of less than $9.50 per share of common stock (with such issue price or effective issue price to be determined in good faith by the Company’s board of directors, and in the case of any such issuance to our Sponsor, initial stockholders or their affiliates, without taking into account any founders’ shares held by them prior to such issuance), (y) the aggregate gross proceeds from such issuances represent more than 60%one-third of the total equity proceeds,number on each of the first, second and interest thereon, availablethird anniversaries of the Closing Date (the “Modification”). The Modification was considered a Type III modification under the Accounting for Share-Based Payments (Topic 718), in which the original awards were canceled, and the modified awards were considered granted on the modification date. Post-modification stock-based compensation expense related to these new awards will be recognized over the remaining service period using modification date fair values. Following the Merger, no further awards will be granted under the 2012 Plan. All stock award activity was retroactively restated to reflect the conversion.
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 fundinggrant of an initial Business Combination onincentive 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 10 years from the date of the consummation of an initial Business Combination (net of redemptions), and (z) the volume weighted average trading pricegrant. The 2021 Plan reserves 5% of the common stock duringfully-diluted shares of Common Stock outstanding immediately following the 20 trading day period starting onClosing Date (not including the trading day priorshares underlying awards rolled over from the 2012 Plan) for issuance in accordance with the 2021 Plan’s terms. As of September 30, 2021, 76,956,754 shares of Common Stock was available under the 2021 Plan.
Share options
During the three months and nine months ended September 30, 2021, the Company recorded stock-based compensation expense of $10.2 million related to the day on which the Company consummated an initial Business Combination (such price, the “Market Value”) is below $9.50 per share, the exercise priceoption awards.
The modification date fair value of the warrants will be adjusted (tostock options was determined using the nearest cent) to be equal to 115% ofBinomial-Lattice Model with the greater of (i) the Market Value or (ii) thefollowing assumptions:
| After modification | ||||
| Exercise price (1) | $ | 4.37-6.28 | ||
| Expected lives (years) (2) | 4.5-9.4 | |||
| Volatility (3) | 47.6%-53.1 | % | ||
| Risk-free interest rate (4) | 1.26-1.87 | % | ||
| Expected dividend yields (5) | 0.00 | % | ||
| Weighted average fair value of options modified | $ | 4.70-5.36 | ||
| (1) | Exercise price |
Exercise price at which the Company issues the additional shares of common stock or equity-linked securities.was extracted from option agreements
| (2) | Expected lives |
Expected lives was derived from option agreements.
1624
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 | 7,578,503 | $ | 5.50 | $ | 2.14 | 7.1 | ||||||||||
| Grant | 27,874,727 | 6.27 | 3.06 | |||||||||||||
| Forfeited | (1,196,158 | ) | 3.89 | 2.04 | ||||||||||||
| Outstanding as of September 30, 2020 | 34,257,072 | $ | 6.19 | $ | 2.90 | 9.2 | ||||||||||
| Expected to vest and exercisable as of September 30, 2020 | 34,257,072 | $ | 6.19 | $ | 2.90 | 9.2 | ||||||||||
| Outstanding as of January 1, 2021 | 34,737,967 | 6.19 | 2.92 | 9.0 | ||||||||||||
| Forfeited | (1,186,220 | ) | 6.27 | 3.13 | ||||||||||||
| Outstanding as of September 30, 2021 | 33,551,747 | $ | 6.19 | $ | 4.95 | 8.2 | ||||||||||
| Expected to vest and exercisable as of September 30, 2021 | 33,551,747 | $ | 6.19 | $ | 4.95 | 8.2 | ||||||||||
The total unrecognized equity-based compensation costs as of September 30, 2021 related to the stock options was $150.2 million, which is expected to be recognized over a weighted-average period of 8.2 years. The aggregate intrinsic value of the share options as of September 30, 2021 was $68,267.
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 $8.8 million related to these non-vested share units awards based on the fair value determined by the lower of stock market price and the capped price as of September 30, 2021.
Non-vested share units activity for the nine months ended September 30, 2020 and 2021 was as follows (all award activity was retroactively restated to reflect the conversion in July 2021):
| Number on Non-Vested Shares | Weighted Average Grant Date Fair Value per Share (US$) | |||||||
| Outstanding as of January 1, 2020 | 19,809,056 | $ | 0.90 | |||||
| Forfeited | (71,494 | ) | $ | 1.42 | ||||
| Transfer from non-vested shares | 3,289,837 | $ | 1.14 | |||||
| Outstanding as of September 30, 2020 | 23,027,399 | $ | 0.93 | |||||
| Outstanding as of January 1, 2021 | 23,027,399 | $ | 0.93 | |||||
| Outstanding as of September 30, 2021 | 23,027,399 | $ | 6.27 | |||||
The total unrecognized equity-based compensation costs as of September 30, 2021 related to the non-vested share units was $135.7 million.
26
MICROVAST HOLDINGS, INC.
(f/k/a TUSCAN HOLDINGS CORP.)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
JUNE
SEPTEMBER 30, 2021
(In thousands of U.S. dollars, except share and per share data, or as otherwise noted)
NOTE 9. FAIR VALUE MEASUREMENTS17. SHARE-BASED PAYMENT - continued
Restricted Stock Units
Following the Merger, the Company granted 133,981 restricted stock units (“RSUs”) and 63,959 performance-based restricted stock unit (“PSU”) awards subject to service, performance and/or market conditions. The service condition requires the participant’s continued services or employment with the Company followsthrough the guidanceapplicable vesting date, and the performance condition requires the achievement of the performance criteria defined in ASC 820 for its financial assets and liabilities that are re-measured and reported atthe award agreement. The market condition is based on is based on the Company’s TSR. For RSU awards with performance conditions, stock-based compensation expense is only recognized if the performance conditions become probable to be satisfied.
The fair value of RSUs is determined by the price of Common Stock at each reportingthe grant date and is amortized over the vesting period and non-financial assets and liabilities that are re-measured and reported aton a straight-line basis. The fair value at least annually.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 $135 related to these RSU awards and $31 related to these PSU awards during the nine months ended September 30, 2021.
The following table presents information about the Company’s assets and liabilities that are measured at fair value on a recurring basis at June 30, 2021 and December 31, 2020 and indicates the fair value hierarchy of the valuation inputs the Company utilizedassumptions were used for respective period to determine such fair value:
| Description | Level | June 30, 2021 | December 31, 2020 | |||||||
| Assets: | ||||||||||
| Cash and marketable securities held in Trust Account | 1 | $ | 281,671,994 | $ | 282,254,978 | |||||
| Liabilities: | ||||||||||
| Warrant Liability – Private Warrants | 3 | 4,183,830 | 4,204,440 | |||||||
| Convertible Promissory Notes – Related Party | 3 | 1,686,000 | 200,000 | |||||||
The Private Warrants were accounted for as liabilities in accordance with ASC 815-40 and are presented within warrant liabilities in the condensed balance sheet. The warrant liabilities are measured at fair value at inception and on a recurring basis, with changes in fair value presented within change in fair value of warrant liabilities in the condensed statements of operations.
The Private Warrants were valued using a binomial lattice simulation model, which is considered to be a Level 3 fair value measurement. The binomial lattice model’s primary unobservable input utilized in determiningcalculate the fair value of common shares to be issued under TSR awards on the Private Warrants isdate of grant using the expected volatility of the common stock. The expected volatility as of the Initial Public Offering dateMonte Carlo pricing model:
Nine Months Ended September 30, | ||||
| Expected term (years) (1) | 2.35 | |||
| Volatility (2) | 63.06 | % | ||
| Average correlation coefficient of peer companies (3) | 0.7960 | |||
| Risk-free interest rate (4) | 0.31 | % | ||
| Expected dividend yields (5) | 0.00 | % | ||
| (1) | Expected term |
Expected term was derived from observable public warrant pricing on comparable ‘blank-check’ companies without an identified target. The expected volatility as of subsequent valuation dates was implied from the Company’s own public warrant pricing.award agreements.
The estimated fair value of the Private Warrants was based on the following significant inputs:
| June 30, 2021 | December 31, 2020 | |||||||
| Exercise price | $ | 11.50 | $ | 11.50 | ||||
| Stock price | $ | 13.63 | $ | 17.10 | ||||
| Volatility | 46.9 | % | 19.5 | % | ||||
| Term | 5.00 | 5.00 | ||||||
| Risk-free rate | 0.78 | % | 0.26 | % | ||||
| Dividend yield | 0.00 | % | 0.00 | % | ||||
The following table presents the changes in the fair value of the Level 3 warrant liabilities:
| Fair value as of January 1, 2021 | $ | 4,204,440 | ||
| Change in fair value | (20,610 | ) | ||
| Fair value as of June 30, 2021 | $ | 4,183,830 |
1727
MICROVAST HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(f/k/a TUSCAN HOLDINGS CORP.)SEPTEMBER 30, 2021
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
JUNE
(In thousands of U.S. dollars, except share and per share data, or as otherwise noted)
The Company elected the fair value option for the Convertible Promissory Notes. The fair value of the Convertible Promissory Notes was determined using a binomial lattice simulation model, which is considered to be a Level 3 fair value measurement.17. SHARE-BASED PAYMENT - continued
(2) Volatility
The estimated fair valuevolatility of the Convertible Promissory Notesunderlying common shares during the lives of the awards was estimated based on the following significant inputs:historical stock price volatility of comparable listed companies over a period comparable to the expected term of the awards.
| June 30, 2021 | ||||
| Exercise price | $ | 11.50 | ||
| Stock price | $ | 13.63 | ||
| Volatility | 46.9 | % | ||
| Term | 5.00 | |||
| Risk-free rate | 0.78 | % | ||
| Dividend yield | 0.00 | % | ||
| Probability of transaction | 90.00 | % | ||
There were no transfers in or out(3) Average correlation coefficient of Level 3 from other levels in the fair value hierarchy during the three and six months ended June 30, 2021.peer companies
The following table presentscorrelation coefficients are calculated based upon the changesprice data used to calculate the historical volatilities and is used to model the way in the fair value of the Level 3 Convertible Promissory Notes:which each entity tends to move in relation to its peers.
| Fair value as of January 1, 2021 | $ | 200,000 | ||
| Proceeds received through Convertible Promissory Notes | 750,000 | |||
| Change in fair value | 736,000 | |||
| Fair value as of June 30, 2021 | $ | 1,686,000 |
NOTE 10. SUBSEQUENT EVENTS
The Company evaluated subsequent events and transactions that occurred after the balance sheet date up to the date that the condensed consolidated financial statements were issued. Based upon this review, other than as described below, the Company did not identify any subsequent events that would have required adjustment or disclosure in the condensed consolidated financial statements.(4) Risk-free interest rate
On July 23, 2021,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 consummatedbased on its expected dividend policy over the previously announced merger pursuant to a certain Agreement and Planexpected term of Merger, dated February 1, 2021, between Tuscan Holdings Corp., Microvast and TSCN Merger Sub Inc., a Delaware corporation, pursuant to which Merger Sub merged with and into Microvast, with Microvast surviving the merger.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 | 3,289,837 | $ | 1.14 | |||||
| Transfer to non-vested share units | (3,289,837 | ) | $ | 1.14 | ||||
| Outstanding as of September 30, 2020 | - | - | ||||||
| Outstanding as of January 1, 2021 | - | - | ||||||
| Grant | 197,940 | $ | 9.60 | |||||
| Vested | (6,157 | ) | $ | 8.52 | ||||
| Outstanding as of September 30, 2021 | 191,783 | $ | 9.63 | |||||
The total unrecognized equity-based compensation costs as of September 30, 2021 related to the non-vested shares was $1.6 million.
Series B2 Preferred subscribed by employees
On October 30, 2015, the Company issued 79,107 Series B2 Preferred to certain employees of the Company. The Series B2 Preferred were issued for cash consideration of $366.00 per share (“Series B2 Award”) and all the Series B2 Preferred were fully paid on the date of issuance. The Series B2 Award shall vest with respect to one-fourth of the total number immediately upon the occurrence of a qualified IPO or Initial Vesting Date, and on each of the first, second and third anniversaries of the Initial Vesting Date; provided that through each applicable vesting date, the holder of the Series B2 Award remains employed with the Company. If a holder of the Series B2 Award terminates employment before the vesting, the Company could repurchase the Series B2 Preferred for a per share price equal to the lower of the original Series B2 Preferred subscription price or 70% of the fair market value of such Series B2 Preferred. The Company’s repurchase right upon employment termination is viewed as forfeiture and the Company accounted for the Series B2 Award as a stock option.
1828
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, 53,319 shares were legally issued and outstanding and the Company recorded a deposit liability of $21,792 at the per share price equal to the original Series B2 Preferred subscription price.
Upon the Merger, the Series B2 Preferred were converted into 8,546,502 Common Stock, however, the Series B2 Award was not vested as the performance condition was not reached. In September 2021, the performance and service condition was exempted for the Series B2 holders and the awards were fully vested. The exemption of performance and service condition was considered a Type III modification under the Topic 718, in which the original awards were canceled, and the modified awards were considered granted on the modification date. Post-modification stock-based compensation expense related to these new awards of $39.2 million was recognized using modification date fair values determined based on the difference between the exercise price and Common Stock price on the modification date. Accordingly, the deposit liability was reclassified to equity upon the vesting.
The following summarizes the classification of stock-based compensation:
| Three Months Ended September 30, 2021 | ||||
| Cost of sales | $ | 2,306 | ||
| General and administrative | 44,164 | |||
| Research and development expenses | 8,303 | |||
| Selling and marketing expenses | 3,518 | |||
| Construction in process | 103 | |||
| Total | $ | 58,394 | ||
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 $618 and $708 for three months ended September 30, 2020 and 2021, respectively. The total provisions for such employee benefits were $1,572 and $1,989 for nine months ended September 30, 2020 and 2021, respectively.
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 | Controlled by CEO | |
| Ochemate | Controlled by CEO |
| (1) | Related party transaction |
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2020 | 2021 | 2020 | 2021 | |||||||||||||
| Raw material sold to Ochem | $ | 11 | $ | 113 | $ | 11 | $ | 406 | ||||||||
| (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 $7,607 and nil, $18,063 and $8,426, respectively.
The outstanding balance for the amount due from Ochem was nil as of December 31, 2020 and $128 as of September 30, 2021, respectively. Also, Ochem and Ochemate provided certain pledges and credit guarantees for the Group to secure bank facilities. Please refer to Note 9.
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 | $ | (21,944 | ) | $ | (120,003 | ) | $ | (64,557 | ) | $ | (187,464 | ) | ||||
| Denominator: | ||||||||||||||||
| Weighted average ordinary shares outstanding used in computing basic and diluted net loss per share | 99,028,297 | 243,861,780 | 99,028,297 | 147,836,650 | ||||||||||||
| Basic and diluted net loss per share | $ | (0.22 | ) | $ | (0.49 | ) | $ | (0.65 | ) | $ | (1.27 | ) | ||||
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 | 26,228,125 | 33,641,132 | 16,854,262 | 33,869,470 | ||||||||||||
| Shares issuable upon vesting of non-vested shares | - | 98,094 | 365,484 | 33,093 | ||||||||||||
| Shares issuable upon exercise of warrants | - | 21,327,750 | - | 7,187,374 | ||||||||||||
| Shares issuable upon conversion of Series B2 Preferred | 8,545,490 | 7,153,219 | 8,545,490 | 8,076,300 | ||||||||||||
| Shares issuable upon conversion of Series C1 Preferred | 26,757,258 | 6,398,475 | 26,757,258 | 19,896,422 | ||||||||||||
| Shares issuable upon conversion of Series C2 Preferred | 20,249,450 | 4,842,260 | 20,249,450 | 15,057,284 | ||||||||||||
| Shares issuable upon conversion of Series D1 Preferred | 22,311,516 | 5,335,362 | 22,311,516 | 16,590,614 | ||||||||||||
| Shares issuable upon conversion of Series D2 Preferred | 6,719,845 | 1,606,919 | 6,719,845 | 4,996,808 | ||||||||||||
| Shares issuable upon conversion of non-controlling interests of a subsidiary | 17,253,182 | 4,125,761 | 17,253,182 | 12,829,289 | ||||||||||||
| Shares issuable upon vesting of Earn-out shares | - | 14,999,991 | - | 5,054,942 | ||||||||||||
| Shares issuable that may be subject to cancellation | - | 1,265,625 | - | 426,511 | ||||||||||||
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 2,600 ordinary shares and (2) various damages and other equitable remedies over $1,000. The Company has denied all allegations and wrongful conduct. On November 11, 2021, the case was reset on the court’s docket, which will postpone the trial from November 2021 until early 2022.
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 $46,144 as of September 30, 2021, which is mainly for the construction of the lithium battery production line.
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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 | $ | 1,004 | ||
| 2022 | 3,865 | |||
| 2023 | 3,310 | |||
| 2024 | 2,535 | |||
| 2025 | 2,111 | |||
| 2026 | 2,111 | |||
| Thereafter | 19,100 | |||
| Total Lease Liabilities | $ | 34,036 | ||
22. SUBSEQUENT EVENTS
New RSU and PSU Grants
On October 27, 2021, the Company granted 265,399 RSUs and 265,399 PSUs to employees, subject to service and market conditions. The service condition requires the participant’s continued employment with the Company through the applicable vesting date, and the market condition requires that the Company’s Common Stock subsequent to the grant date above a specified level for a defined period of time.
Acquisition of Building
In October 2021, the Group acquired a building in Florida, United States, at the cost of $11.0 million for research and development projects.
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ITEMItem 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSManagement’s Discussion and Analysis of Financial Condition and Results of Operations.
References in this report (the “Quarterly Report”(the “Report”) to “we,the “Company,” “Microvast Holdings, Inc.,” “Microvast,” “our,” “us” or the “Company”“we” refer to TuscanMicrovast Holdings, Corp. References to our “management” or our “management team” refer to our officers and directors, references to the “Sponsor” refer to Tuscan Holdings Acquisition LLC.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 Quarterly Report.report. Certain information contained in the discussion and analysis set forth below includes forward-looking statements that involve risks and uncertainties.
Special Note Regarding Forward-Looking StatementsCompletion of the Business Combination
This Quarterly Report includes “forward-looking statements” withinOn July 23, 2021 (the “Closing Date”), Microvast Holdings, Inc. (formerly known as Tuscan Holdings Corp.) consummated the meaningpreviously announced acquisition of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act that are not historical facts and involve risks and uncertainties that could cause actual results to differ materially from those expected and projected. All statements, other than statements of historical fact included in this Form 10-Q including, without limitation, statements in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” regarding the Company’s financial position, business strategy and the plans and objectives of management for future operations, are forward-looking statements. Words such as “expect,” “believe,” “anticipate,” “intend,” “estimate,” “seek” and variations and similar words and expressions are intended to identify such forward-looking statements. Such forward-looking statements relate to future events or future performance, but reflect management’s current beliefs, based on information currently available. A number of factors could cause actual events, performance or results to differ materially from the events, performance and results discussed in the forward-looking statements. For information identifying important factors that could cause actual results to differ materially from those anticipated in the forward-looking statements, please refer to the Risk Factors section of the Company’s Annual Report on Form 10-K and Form 10-K/A for the year ended December 31, 2020 as filed with the SEC on March 24, 2021 and June 1, 2021, respectively. The Company’s securities filings can be accessed on the EDGAR section of the SEC’s website at www.sec.gov. Except as expressly required by applicable securities law, the Company disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise.
Overview
We are a blank check company incorporated on November 5, 2018 asMicrovast, Inc., a Delaware corporation (“Microvast”), pursuant to the Agreement and formed for the purposePlan of entering into a merger, share exchange, asset acquisition, stock purchase, recapitalization, reorganization or similar Business Combination with one or more businesses or entities. We intend to effectuate our initial Business Combination using cash from the proceeds of the Initial Public Offering and the sale of the Private Units, our capital stock, debt or a combination of cash, stock and debt.
Our entire activity since inception relates to our formation, to prepare for our Initial Public Offering, which was consummated on March 7, 2019, and identifying a company for a Business Combination.
Recent Developments
Microvast Business Combination
OnMerger (the “Merger Agreement”) dated February 1, 2021, we entered into the Merger Agreement withbetween Tuscan Holdings Corp. (“Tuscan”), Microvast and TSCN Merger Sub. PursuantSub Inc., a Delaware corporation (“Merger Sub”), pursuant to the Merger Agreement,which Merger Sub merged with and into Microvast, andwith Microvast survivedsurviving the merger and became our wholly owned subsidiary. Under(the “Merger”).
In connection with the Merger Agreement, allTuscan, 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 equity interests of Microvast was converted into an aggregate of 210,000,000 shares of common stock. The Microvast shareholders and the investors in Microvast’s majority-owned subsidiary, MPS, have the ability to earn an additional 20,000,000CL Investors (“CL Affiliates”) subscribed for 6,719,845 shares of common stock, if$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 daily volume weighted average price of the common stock is greater than or equal to $18.00 for any 20 trading days within a 30 trading day period (or a change of control occurs that results inMerger Agreement, Tuscan entered into subscription agreements with (a) the holders of common stock receiving a per share price equalan aggregate of $57,500,000 outstanding promissory notes issued by Microvast (the “Bridge Notes”) pursuant to or in excess of $18.00), during the period commencing on the closing date and ending on the third anniversary of the closing date. Concurrently with the execution of the Merger Agreement, we and Microvast acquired 100% ownership of MPS and discharged certain convertible loans of MPS.
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Additionally, the Merger Agreement issuedwhich Tuscan agreed to issue an aggregate of 6,736,106 shares of common stock in connection withupon conversion of the Bridge Note Conversion.
Further, on February 1, 2021, we, the Sponsor, MicrovastNotes (the “Bridge Notes Conversion”), and certain(b) a number of our stockholders entered into the Sponsor Support Agreement, pursuantoutside investors who agreed to which the Sponsor Group agreed, among other things, to vote all equity interestspurchase an aggregate of the Company held by such member of the Sponsor Group in favor of the approval and adoption of the proposed business combination with Microvast. Additionally, such members of the Sponsor Group have agreed not to (a) transfer any of their equity interests in the Company (or enter into any arrangement with respect thereto) other than as set forth therein or (b) exercise any conversion rights of any equity interests held by such member of the Sponsor Group in connection with the approval of the proposed business combination.
The Sponsor also agreed that, to the extent that certain of our expenses are in excess of $46,000,000 (unless such expenses shall have been approved by Microvast), the Sponsor will either (i) pay any such excess amount in cash or (ii) forfeit to us such number of48,250,000 shares of common stock held by the Sponsor that would have a value equal to such excess. The Sponsor also agreed to amend the escrow agreement to make certain adjustments to the terms of the escrow of its shares of common stock as set forth in the Sponsor Support Agreement.
Contemporaneously with the execution of the Merger Agreement, certain investors entered into Subscription Agreements pursuant to which such investors subscribed for an aggregate value of $482,500,000, representing 48,250,000 shares of our common stock at a purchase price of $10.00 per share, in a private placement to be consummated immediately prior to the consummation of the Transactions. Affiliates of InterPrivate, our co-sponsor, subscribed to purchase 6.5 million shares in the PIPE Financing for an aggregate purchase price of $65 million.$482,500,000 (the “PIPE Financing”).
Extension Amendment
On December 3, 2020, we received stockholder approval to extendThe CL Private Placement, the date by which it must complete an initial business combination from December 7, 2020 to April 30, 2021. In connectionBridge Notes Conversion and the PIPE Financing closed contemporaneously with such extension, holders of 3,198 Public Shares exercised their right to convert their shares into cash at a conversion price of approximately $10.22 per share, for an aggregate conversion amount of approximately $32,684. Additionally, on May 10, 2021, at a reconvened annual meeting of stockholders initially convened on April 28, 2021, we received stockholder approval to further extend the date by which we are required to complete a business combination from April 30, 2021 to July 31, 2021. In connection with such extension, holders of an aggregate of 13,290 Public Shares exercised their right to redeem their shares for cash.
Loan Commitment
On February 12, 2021, we issued an unsecured promissory note toclosing under the Sponsor inMerger Agreement (collectively, the aggregate amount of $1,200,000. The Convertible Promissory Notes are non-interest bearing and payable upon“Closing”). Upon the consummation of a Business Combination. The Convertible Promissory Notes are convertible, at the lender’s option, into unitsClosing of the post Business Combination entity atMerger, the CL Private Placement, the Bridge Notes Conversion, the PIPE Financing and related transactions (collectively, the “Business Combination”), Microvast became a pricewholly-owned subsidiary of $10.00 per unit. The units would be identical to the Private Units. If a Business Combination is not consummated,Company, with the Convertible Promissory Notes will not be repaid bystockholders of Microvast becoming stockholders of the Company, and all amounts owed thereunder bywith the Company will be forgiven exceptrenamed “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 extentkey 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 Company has funds available to it outsidelong battery life of its Trust Account.our battery systems also reduces the total cost of ownership of electric vehicles and energy storage applications.
Nasdaq NotificationWe 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.
On January 6, 2021, we received a notice from the Listing Qualifications Department of The Nasdaq Stock Market stating that we failed to hold an Annual Meeting of stockholders within 12 months after our fiscal year ended December 31, 2019, as required by Nasdaq Listing Rule 5620(a). In accordance with Nasdaq Listing Rule 5810(c)(2)(G), we submitted a plan to regain compliance on February 4, 2021. Nasdaq accepted our plan and granted us an extension through June 29, 2021 to hold an annual meeting. Nasdaq’s decision is subject to certain conditions, including that we provide periodic updates with respect to our proposed business combination with Microvast. On April 28, 2021, we held an annual meeting of stockholders, in compliance with our plan.
On May 28, 2021, the Company received a notice from the Listing Qualifications Department of The Nasdaq Stock Market stating that because we failed to timely file our Quarterly Report on Form 10-Q for the quarter ended March 31, 2021, we were not in compliance with Nasdaq Listing Rule 5250(c)(1). The Company believes that compliance with the listing rule was regained on June 2, 2021 with the filing of the Company’s Form 10-Q for the quarter ended March 31, 2021.
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Results of OperationsAdditionally, 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.
Our only activities through June 30, 2021 were organizational activities, those necessary to consummate the Initial Public Offering, described below, searching for a target company for a Business Combination,Since we launched our first ultra-fast battery system in 2009, we have sold and activities in connection with the proposed acquisitiondelivered approximately 2,422.3 MWh of Microvast. We do not expect to generate any operating revenues until after the completionbattery systems. As of our Business Combination. We generate non-operating income in the form of interest income on marketable securities held in the Trust Account. We incur expenses as a result of being a public company (for legal, financial reporting, accounting and auditing compliance), as well as for due diligence expenses.
For the three months ended JuneSeptember 30, 2021, we had a net lossbacklog order of $2,050,595, which consistedapproximately $52.7 million for our battery systems equivalent to approximately 214.6 MWh, compared to the backlog order of operating costsapproximately $31.9 million for our battery systems equivalent to approximately 90.8 MWh as of $543,914, change in the fair value of convertible promissory notes of $380,000, change in fair value of warrants of $1,119,810, unrealized losses of $420 and provisionSeptember 30, 2020. Our revenue for incomes taxes of $16,954, offset by interest income of $10,503.
For the six months ended June 30, 2021, we had a net loss of $2,099,420, which consisted of change in the fair value of convertible promissory notes of $736,000 and operating costs of $1,434,843, offset by change in the fair value of warrants of $20,610, interest income of $46,299 and a benefit for income taxes of $4,514.
For the three months ended JuneSeptember 30, 2020, we had a net loss of $297,162, which consisted of operating costs of $251,714, change2021 increased $6.1 million, or 20.0%, compared to the same period in the fair value of warrants of $133,965, and unrealized loss on marketable securities held in Trust Account of $938,273, offset by interest income on marketable securities held in Trust Account of $983,408 and benefit from income taxes of $43,382.2020.
ForAfter initially focusing on the six months ended June 30, 2020,PRC and Asia & Pacific region, we had a net income of $1,606,293, which consisted of change in fair value of warrants of $3,435, interest incomehave expanded our presence and product promotion to Europe and the United States to capitalize on marketable securities held in Trust Account of $2,010,565, and unrealized gain on marketable securities held in Trust Account of $499,967, offset by operating costs of $480,463 and a provision for income taxes of $427,211.their rapidly growing electrification markets.
LiquidityIn Europe, we have delivered over 1,500 units of ultra-fast charging battery systems to bus OEMs and Capital Resources
On March 7, 2019, we consummated our Initial Public Offeringoperators as of 24,000,000 Units, at a price of $10.00 per Unit, generating gross proceeds of $240,000,000. SimultaneouslySeptember 30, 2021. Small-scale prototype projects are ongoing with the closing of the Initial Public Offering, we consummated the sale of 615,000 Private Unitsregard to our Sponsorsports cars, commercial vehicles, trucks, port equipment and EarlyBirdCapital and its designee, generating gross proceeds of $6,150,000.
On March 12, 2019, in connection with the underwriters’ exercise of their over-allotment option in full, we consummated the sale of an additional 3,600,000 Units at a price of $10.00 per Unit, generating total gross proceeds of $36,000,000.marine applications. In addition, we also consummated the sale of an additional 72,000 Private Units to our Sponsorare jointly developing electric power-train solutions with leading commercial vehicle OEMs and EarlyBirdCapitala first-tier automotive supplier using LTO, NMC1 and its designee at $10.00 per Private Unit, generating total gross proceeds of $720,000.NMC2 technologies.
FollowingKey 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 Initial Public Offering,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 exercisefuture, 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 over-allotment optioncommercial and passenger electric vehicle and energy storage markets. Many factors contribute to the saledevelopment 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 Private Units,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 totalmeasured manner based on our ongoing assessment of $276,000,000 was placed in the Trust Account. We incurred $6,059,098 in Initial Public Offering related costs, including $5,520,000medium- and long-term demand for our solutions. Our planned capacity expansion will require significant capital expenditures and will require corresponding expansion of underwriting fees,our supporting infrastructure, further development of our sales and $539,098marketing team, expansion of other costs.our customer base and strengthened quality control.
As of June 30, 2021, we had marketable securities held in the Trust Account of $281,671,994 (including approximately $7,751,000 of interest income and unrealized gains) consisting of U.S. treasury bills with a maturity of 180 days or less. Interest income on the balance in the Trust Account may be used by us to pay taxes. Through June 30, 2021, we withdrew approximately $2,079,000 of interest earned on the Trust Account to pay our franchise and income tax obligations and share redemptions, of which $629,000 were withdrawn during the three and six months ended June 30, 2021.
For the six months ended June 30, 2021, cash used in operating activities was $1,290,879. Net loss of $2,099,420 was affected by change in fair value of warrants of $20,610, interest earned on marketable securities held in Trust Account of $46,299 and a change in the fair value of convertible promissory notes of $736,000. Changes in operating assets and liabilities provided $160,918 of cash from operating activities.
For the six months ended June 30, 2020, cash used in operating activities was $545,136. Net income of $1,606,293 was affected by change in fair value of warrants of $3,435, interest earned on marketable securities held in Trust Account $2,010,565, unrealized gain on marketable securities held in Trust Account of $499,967, and deferred income tax provision of $77,924. Changes in operating assets and liabilities provided $284,614 of cash from operating activities.
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We intendSales Geographic Mix
After primarily being focused on the PRC and Asia & Pacific region, we are expanding our presence and product promotion to use substantially allEurope 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 funds heldUnited 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 Trust Account,PRC, making them less sensitive to acquire a target business and to pay our expenses relating thereto, including a fee payable to EarlyBirdCapital, upon consummationthe price of our initial Business Combination for assisting usproducts than are similarly situated buyers in connectionthe 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 initial Business Combination. Tosuppliers 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 extentcost 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 our capital stock is usedmay 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 whole or in part as consideration to effect a Business Combination, the remaining funds heldturn benefit us. We have operations and sales in the Trust Account will be usedPRC, the Asia & Pacific region, Europe and the United States and, as working capitala result, changes in trade restrictions and tariffs could impact our ability to finance themeet projected sales or margins.
COVID-19
To date, COVID-19 has had an adverse impact on our sales, operations, of the target business. Such working capital funds could be usedsupply chains, and distribution systems, and has resulted in a varietyone-month shutdown of ways including continuing or expandingour factories and in delivery delays. During the target business’ operations, for strategic acquisitions and for marketing, research and developmentnine months ended September 30, 2021, we faced unanticipated challenges caused by the continued impact of existing or new products. Such funds could also be used to repay any operating expenses or finders’ fees which we had incurred priorglobal pandemic. Certain customers deferred their purchases due to the completionpandemic. Due to precautionary measures related to COVID-19 and resulting global economic impacts, we may experience further reductions in demand for certain of our Business Combination if the funds available to us outside of the Trust Account were insufficient to cover such expenses.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 JuneSeptember 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 cashbank borrowings of $66,475. We intend$22.9 million, the terms of which range from 6 months to use the funds held outside the Trust Account for identifying12 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 evaluating prospective acquisition candidates, performing business due diligence on prospective target businesses, traveling to$14.7 million in 2026. As of September 30, 2021, we were in compliance with all material terms and from the offices, plants or similar locationscovenants of prospective target businesses, reviewing corporate documentsour loan agreements, credit agreements, bonds and material agreements of prospective target businesses, selecting the target business to acquire and structuring, negotiating and consummating the Business Combination.notes.
On April 21, 2020, the Company issued an unsecured promissory note to the Sponsor in the aggregate amount of $300,000 (the “Note”), of which $200,000 was drawn upon on such date. On February 12, 2021, the Company issued an unsecured promissory note to the Sponsor in the aggregate amount of $1,200,000 (together, with the Note, the “Convertible Promissory Notes”). The Convertible Promissory Notes are non-interest bearing and payable upon the consummation of a Business Combination. The Convertible Promissory Notes are convertible, at the lender’s option, into units of the post Business Combination entity at a price of $10.00 per unit. The units would be identical to the Private Units. If a Business Combination is not consummated, the Convertible Promissory Notes will not be repaid by the Company and all amounts owed thereunder by the Company will be forgiven except to the extent that the Company has funds available to it outside of its Trust Account.
In order to fund working capital deficiencies or finance transaction costs in connection with a Business Combination, the Sponsor or our officers and directors or their affiliates may, but are not obligated to, loan us funds on a non-interest basis as may be required, except as described above. If we complete our initial Business Combination, we will repay such loaned amounts. In the event that our initial Business Combination does not close, we may use a portion of the working capital held outside the Trust Account to repay such loaned amounts but no proceeds from our Trust Account would be used for such repayment. Up to $1,500,000 of notes may be convertible into Private Units, at a price of $10.00 per unit. The units would be identical to the Private Units.
In addition, the Company has secured an aggregate of $482.5 million in funding through the PIPE Financing as part of the consummation of the business that occurred on July 23, 2021.
Off-Balance Sheet Financing Arrangements
We did not have any off-balance sheet arrangements as of June 30, 2021.
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Contractual ObligationsThe 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.
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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.
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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.
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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 dobelieve this issue is limited to this legacy product which we ceased selling in late 2018, as the component was not haveincorporated into any long-term debt, capital lease obligations, operating lease obligationsother 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 long-term liabilities other than an agreement113.5%, compared to pay an affiliatethe 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 Sponsorsales 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 monthly feeresult of $10,000 for office space, utilitiesour efforts to further develop and secretarialenhance our products; and administrative support. We began incurring these fees(iii) the increased share-based compensation expense recorded during the third quarter of 2021.
Loss on March 5, 2019changes 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 will continueFebruary 2021 to incur these fees monthly untilnew investors.
Gain on change in fair value of warrant liability
In the earlierthree months ended September 30, 2021, we incurred gain of $1.1 million due to change in fair value of warrant liability.
Comparison of the completionNine 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 Business Combinationindustry-wide semiconductor chip shortage, which resulted in a higher manufacturing cost per unit.
Certain products we sold during 2017 and 2018 to our liquidation.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 have engaged EarlyBirdCapitalbelieve 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 Morgan Stanley to provide financial advisory services in connection with our initial business combination,the accrued cost for which such firms will receive fees upon consummation ofnine months ended September 30, 2021 was $44.6 million.
Operating Expense
Selling and Marketing
Selling and marketing expenses for the transaction with Microvast, as described in more detail in Note 6nine months ended September 30, 2021 increased $4.8 million, or 50.5%, compared to the financial statements. We also engaged Morgan Stanleysame 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 placement agentwe 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 PIPE Financing,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 which such firm will receive a fee as described in more detail in Note 6the 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 financial statements. 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 condensedthese consolidated financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires managementus to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses, and liabilities, disclosure of contingent assetsrelated disclosures. We evaluate our estimates and liabilities atassumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the date of the financial statements, and income and expenses during the periods reported. Actualcircumstances. Our actual results could materially differ from thosethese estimates.
We have identifiedbelieve the following critical accounting policies: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.
Warrant Liability
We account 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 meet the definition of a derivative as contemplated in ASC 815, we classify the Private Warrants as liabilities at their fair value and adjusts the Private Warrants to fair value at each reporting period. This liability is subject to re-measurement at each balance sheet date until exercised, and any change in fair value is recognized in our statements of operations. The Private Warrants for periods where no observable traded price was available were valued using a binomial lattice model.
Common Stock Subject to Possible Redemption
We account for common stock subject to possible redemption in accordance with the guidance in Accounting Standards Codification (“ASC”) Topic 480 “Distinguishing Liabilities from Equity.” Common stock subject to mandatory redemption is classified as a liability instrument and is measured at fair value. Conditionally redeemable common stock (including common stock that feature redemption rights that is either within the control of the holder or subject to redemption upon the occurrence of uncertain events not solely within our control) is classified as temporary equity. At all other times, common stock is classified as stockholders’ equity. Our common stock features certain redemption rights that are considered to be outside of our control and subject to occurrence of uncertain future events. Accordingly, common stock subject to possible redemption is presented at redemption value as temporary equity, outside of the stockholders’ equity section of our condensed balance sheets.
Net Loss Per Common Share
We apply the two-class method in calculating earnings per share. Net income (loss) per common share, basic and diluted for common stock subject to possible redemption is calculated by dividing the interest income earned on the Trust Account, net of applicable taxes, if any, by the weighted average number of shares of common stock subject to possible redemption outstanding for the period. Net income (loss) per share, basic and diluted for and non-redeemable common stock is calculated by dividing net loss less income attributable to common stock subject to possible redemption, by the weighted average number of shares of non-redeemable common stock outstanding for the period presented.
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Revenue Recognition
Recently Adopted Accounting StandardsNature 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 August2018, 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 FASB issued ASU No. 2020-06, “Debt—Debt with Conversionnine months ended September 30, 2021, no such sales incentives were granted to customers.
Contract Balances
Contract balances include accounts receivable and Other Options (Subtopic 470-20)advance from customers. Accounts receivable represent cash not received from customers and Derivativesare 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 Hedging—Contractsthe nine months ended September 30, 2021, we recognized $0.6 million and $1.4 million of revenue previously included in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity” (“ASU 2020-06”), which simplifies accounting for convertible instruments by removing major separation models required under current GAAP. ASU 2020-06 removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception and it also simplifies the diluted earnings per share calculation in certain areas. ASU 2020-06 is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years, with early adoption permitted. We adopted ASU 2020-06 effectiveadvance 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 adoptionallocated 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 ASU 2020-06future 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 have an impactqualify 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 our financial statements.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 does not believe that any other recently issued, but not yet effective, accounting standards,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 currently adopted, would havethe new estimate had been applied since the service inception date. As a material effect onresult, our condensed financial statements.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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ITEMItem 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKQuantitative and Qualitative Disclosures About Market Risk
Not required for smaller reporting companies.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.
ITEMItem 4. CONTROLS AND PROCEDURESControls and Procedures
Evaluation of Disclosure controlsControls and procedures are controlsProcedures
Under supervision and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted underwith the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is accumulated and communicated toparticipation of our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation ofevaluated the effectiveness of our disclosure controls and procedures as of the end of the fiscal quarter ended June 30, 2021, as such term is(as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act.Act of 1934, as amended (the “Exchange Act”)) as of September 30, 2021. Based on thisupon that evaluation, our principal executive officerChief Executive Officer and principal financial officer haveChief Financial Officer concluded that solely due to the events that led to the Company’s restatement of its financial statements to reclassify the Company’s Private Warrants as liabilities (which are described in the Company’s Amendment No. 1 to its Annual Report on Form 10-K/A filed on June 1, 2021) (the “Restatement”), during the period covered by this report, a material weakness existed and our disclosure controls and procedures were not effective.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 docontinue 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 instances of fraud. Disclosure controls and procedures,A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedurescontrol system are met. Further, the design of disclosure controls and procedures must reflect the fact that there are resource constraints, and the benefits must be considered relative to their costs. Because of the inherent limitations in all disclosure controls and procedures,control systems, no evaluation of disclosure controls and procedures can provide absolute assurance that we have detected all our control deficienciesissues and instances of fraud, if any.any, within the company have been detected. The design of disclosureany system of controls and procedures also is based partly onin 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.
Changes in Internal Control Over Financial Reporting
During the most recently completed fiscal quarter, there has been no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting, as the circumstances that led to the Restatement of our financial statements had not yet been identified. Due solely to the events that led to our Restatement of our financial statements, management has identified a material weakness in our internal control over financial reporting relating to the accounting for our Private Warrants. To respond to this material weakness, we have devoted, and plan to continue to devote, significant effort and resources to the remediation and improvement of our internal control over financial reporting. While we have processes to identify and appropriately apply applicable accounting requirements, we plan to enhance these processes to better evaluate our research and understanding of the nuances of the complex accounting standards that apply to our financial statements. Our plans at this time include providing enhanced access to accounting literature, research materials and documents and increased communication among our personnel and third-party professionals with whom we consult regarding complex accounting applications. 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.
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PART II - OTHER INFORMATION
ITEMItem 1. LEGAL PROCEEDINGSLegal Proceedings
None.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.
ITEMItem 1A. RISK FACTORSRisk Factors
Factors that could cause our actual results to differ materially from those in this report includeAs a result of the closing of the Business Combination on July 23, 2021, certain of the risk factors describedpreviously disclosed in Part I, Item 1A of our Annual Report on Form 10-K/A10-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 with the SEC on June 1, 2021. As of the date of this Report, there have been no material changes toAugust 20, 2021, and as further amended, including the risk factors disclosedincorporated 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 Annual Report filedfuture filings with the SEC.
ITEMItem 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDSUnregistered Sales of Equity Securities and Use of Proceeds
None.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.
ITEMItem 3. DEFAULTS UPON SENIOR SECURITIESDefaults upon Senior Securities
None.
ITEMItem 4. MINE SAFETY DISCLOSURESMine Safety Disclosures
None.Not applicable.
ITEMItem 5. OTHER INFORMATIONOther Information
None.
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ITEMItem 6. EXHIBITS.Exhibits.
The following exhibits are filedfurnished as part of, or incorporated by reference into, this Quarterly 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. |
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SIGNATURES
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 thereuntohereunto duly authorized.
| Dated: November 15, 2021 | MICROVAST HOLDINGS, INC. | |
| /s/ Yanzhuan Zheng | ||
| Name: | Yanzhuan Zheng | |
| Title: | Chief Financial Officer | |
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