10-Q/A: Microvast Holdings Restates Q3 2024 Financials Due to $23.1 Million Understatement of Impairment Charge

Microvast Holdings files an amendment to its Q3 2024 report to restate financials due to an understatement of an impairment charge related to its Clarksville, Tennessee property, increasing the charge by $23.1 million.

Summary

• Microvast Holdings, Inc. is filing an amendment to its Q3 2024 report to restate its unaudited consolidated financial statements.
• The restatement corrects an understatement of an impairment charge associated with the company's Clarksville, Tennessee property.
• The company inadvertently excluded clean rooms from the calculation of the carrying value of the asset group, leading to an understatement of the impairment charge.
• The impairment charge for the three-month period ended June 30, 2024, was increased by $23.1 million, from $64.9 million to $88.0 million.
• This adjustment aligns the carrying value of the Clarksville Property with the valuation scope of the third-party appraisal.
• The restatement does not affect the company's ongoing operations or liquidity.
• The company has strengthened controls over impairment assessment of long-lived assets to prevent future misstatements.
• The company believes this material weakness identified as it implemented its SOX controls has been remediated for the period ended December 31, 2024.
• As of November 8, 2024, there were 323,815,298 shares of the Company's common stock issued and outstanding.

Sentiment

Score: 4

Explanation: The document highlights a restatement due to an accounting error, raising concerns about internal controls. While the company is taking corrective actions and achieved profitability in Q3, the going concern warning and ongoing legal issues contribute to a negative sentiment.

Positives

• The company has strengthened controls over impairment assessment of long-lived assets to prevent future misstatements.
• The company achieved profitability in the third quarter of 2024.
• The company is actively pursuing the sale of non-core U.S. real estate assets, with an expectation of increasing liquidity without affecting core operations.

Negatives

• The company identified a material weakness in its internal control over financial reporting related to the absence of a precise review on impairment provision calculation as of June 30, 2024.
• The restatement increased the net loss for the nine months ended September 30, 2024, from $90.0 million to $113.1 million.
• Basic and diluted net loss per share for the nine months ended September 30, 2024, increased from $(0.28) to $(0.36).

Risks

• The company's ability to continue as a going concern is dependent on its ability to raise additional capital or secure financing.
• The company is projecting that its existing cash and cash equivalents will not be sufficient to fund its operations and capital expenditure needs through the next twelve months.
• The company is involved in multiple legal proceedings, the outcomes of which are uncertain and could have a material adverse effect.
• The company needs to secure financing to meet the remaining capital expenditure needs for the Tennessee expansion, and the timing of when this project will be in operation remains uncertain.
• The company is unable to repatriate cash from China to pay its accounts payable in the U.S. and fund the continued expansion of its U.S. operations.

Future Outlook

Microvast aims to expand its focus on ESS to capitalize on the growing demand for renewable energy solutions and intends to produce LFP cells from its Tennessee facility for ESS solutions.

Management Comments

• With profitability achieved in the third quarter of 2024, management expects that continued execution of its strategies will generate positive cash flow from operations over the next twelve months.

Industry Context

The strategic shift towards LFP technology in the U.S. leverages cost benefits, safety features, regulatory compliance, and lower environmental impact, aligning with broader industry trends in the energy storage market.

Comparison to Industry Standards

• LFP batteries are generally 20-40% less expensive per kilowatt-hour compared to NMC batteries.
• The extended lifecycle of LFP batteries enhances their cost-effectiveness over prolonged operational durations, presenting a compelling value proposition for large-scale energy storage applications.

Corporate Governance

Legal Proceedings

• The directors of Company predecessor, Tuscan, have been named as defendants in a litigation filed in the Court of Chancery captioned Matt Jacob v. Stephen A. Vogel, et al.
• The Company, the directors of Company predecessor, Tuscan, and certain former and current Company officers and directors have also been named as defendants in a litigation filed in the Court of Chancery captioned Denish Bhavsar v. Stephen Vogel, et al.
• The Company, and certain former and current Company officers and directors have also been named as defendants in a litigation filed in the Court of Chancery captioned Henry Park v. Yang Wu, et al.
• The Company and certain of its officers have also been named as defendants in a putative class action complaint by a shareholder of the Company in the U.S. District Court for the Southern District of Texas under the caption Schelling v. Microvast Holdings, Inc.
• The Company and certain of its officers and directors have also been named as defendants in three derivative actions filed in the Southern District of Texas under the captions Bhavsar v. Wu et al., Marti et al v. Wu et al, Gidaro v. Wu et al.
• The Company and Microvast Energy, Inc. (Microvast Energy), a subsidiary of the Company, have been named as defendants in a litigation filed in the Chancery Court for the State of Tennessee under the caption Stoncor Group, Inc. v. Microvast, Inc., et al
• Microvast, Inc., a subsidiary of the Company, has been named as a defendant in a contract dispute litigation filed in Montgomery County Chancery Court for the State of Tennessee under the caption DPR Construction, GP vs. Microvast, Inc., et al
• Microvast, Inc. has been named as a defendant in a contract dispute litigation filed in Montgomery County Chancery Court for the State of Tennessee under the caption Faith Technologies, Inc. Microvast, Inc. et al.
• Microvast, Inc. has been named as a defendant in an action filed in Montgomery County Chancery Court for the State of Tennessee under the caption Bernhard MCC v. Hodess Cleanroom Construction, LLC, Hodess Construction Corporation, Microvast, Inc., and The Industrial Development Board of the County of Montgomery
• Microvast, Inc. was named as a defendant in an action filed in Montgomery County Chancery Court for the State of Tennessee under the caption Bernhard MCC, LLC. vs. U.S. Engineering Innovations, LLC, DPR Construction, Microvast, Inc. and the Industrial Development Board of the County of Montgomery
• Microvast, Inc. was named as a defendant in an action filed in Montgomery County Chancery Court for the State of Tennessee under the caption Virginia Transformer Corp. v. Microvast, Inc.and the Industrial Development Board of the County of Montgomery, Tennessee

Related Party Transactions

• On May 28, 2024, Microvast Inc. entered into a $25,000 convertible loan agreement with Mr. Yang Wu, the Company's Chief Executive Officer and Chairman.

Stakeholder Impact

• The restatement of financials may impact investor confidence.
• The company's ability to continue as a going concern raises concerns for employees, suppliers, and creditors.
• The outcome of legal proceedings could have a material adverse effect on the company's business, results of operations, financial condition, and cash flows.

Next Steps

• The company is actively pursuing the sale of non-core U.S. real estate assets.
• The company is engaged in discussions with third parties to explore further funding options.
• The company is evaluating the amount of capital expenditures needed to complete the Tennessee expansion in light of the intended production shift from NMC cells to LFP cells.

Key Dates

Keywords

restatement, impairment charge, Clarksville Property, financial statements, Microvast, financial results, SOX controls, going concern, litigation, financing