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Operator
Thank you for standing by. This is the conference operator. Welcome to the micro vast first quarter 2022 earnings call. As a reminder, all participants are in listen only mode and the conference is being recorded. After the presentation, community professionals have the opportunity to participate in the question and answer session. To join the question queue, you may press star then one on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star and zero. I would now like to turn the conference over to Sarah Alexander, Microglass General Counsel. Please go ahead.
Sarah Alexander
Thank you, operator, and thanks to the audience for joining us today. Mr. Yang Wu, Chief Executive Officer, will begin today's call with some opening remarks. Krev Webster, who was recently appointed as our Chief Financial Officer, and Sasha Kelterborn, who was recently promoted to the position of president, will host today's call. Leon Zeng, our former chief financial officer who has transitioned into an advisory role with MicroVast, is also on the line. Ahead of this call, MicroVast issued its first quarter 2022 earnings press release, which can be found on the investor relations section of our website, ir.microvast.com. In addition, we have posted tonight's accompanying slideshow presentation to our website. As a reminder, please note that we will be making forward-looking statements on this call. These statements are based on current expectations and assumptions and reflect our views only as of today. They should not be relied upon as representative about views as of any subsequent date. and we undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events. These statements are subject to a variety of risks and uncertainties that could cause actual results to differ materially from expectations. For further discussion of the material risks and other important factors that could affect our financial results, please refer to our filings with the SEC including our annual report on Form 10-K, filed on March 29, 2022. In addition, during today's call, we may discuss non-GAAP financial measures, including adjusted gross profit, adjusted net loss, and adjusted EBITDA, which we believe are useful as supplemental measures of microvast performance. These non-GAAP measures should be considered in addition to and not as a substitute for or in isolation from GAAP results. These non-GAAP measures have been reconciled to their most comparable GAAP metric in the tables included at the end of our earnings press release. A webcast replay of this call will also be available on the investor relations section of our company website. With that, I will turn the call over to Mr. Wu for some opening remarks.
Yang Wu
Thank you, Sarah. First, I would like to take a few minutes to address the leadership changes that we announced last month. Leon has been the CFO of Microbots for the last 12 years and has been an integral part of building this company. We would not be where we are today without his leadership, guidance, and a steady hand. I want to personally thank him for his years of loyal service and for his continued service as an advisor and as a director. Craig has been involved with Microrot for over 10 years, and he knows our business and industry very well. I'm confident that he has a skill set required to take Microrot to the next level, and I look forward to working with him in his new role as the CFO. Sasha joined MicroVox in 2016 and has been an integral part of our growth strategy in the Western Hemisphere. He will assume responsibility for the company's day-to-day operations in a new role as president. I will continue to serve as the company's chief executive officer. This new leadership structure will enable me to focus on MicroVox strategic direction. I'm confident that this team will best position Michael Ross to execute on the opportunities in front of us. Sasha will touch on our business results and Chris will review the financial performance in more detail in a few moments. However, I would now like to turn the call over to Leon. Thank you all.
Sarah
Thank you, Mr. Wu. First, it has been an honor to serve Michael West as his chief financial officer. I'm very proud of the business we have built, and I'm excited about the company's future. When I joined Michael West in 2010, the company had very few employees and no revenue, only Mr. Wu's electrification region. Over the last 12 years, we've built a strong team and work together to execute that vision. I'm blessed to have been a part of this journey, and I'm even more excited about the opportunities that remain in front of MarketWest. Craig has been involved in MarketWest as a member of our board of directors since 2012. He and I have developed a great working relationship over the last decade. He knows our business and the industry very well. And I'm confident he's the right person to step into the role of chief financial officer and to help lead the microwave into his next growth phase. I look forward to working closely with him to ensure a smooth transition. I have the utmost confidence in microwave's future. I look forward to continuing to serve this company as a director. working together with Craig in my new advisory room, and I will continue to support Microwave as a shareholder for many years to come. Thank you to our shareholders for your confidence, support, and patience. And thank you to the Microwave team around the globe. It has been a true pleasure to work with each and every of you. With that, I will turn the call over to Shasha, President of Microwave.
Wu
Thank you, Leon. On a personal note, I have very much enjoyed working with you the last few years, and I'm pleased that you have chosen to continue forward with Microwave as a director and in an advisory capacity. Your historical knowledge of this business is vast. I'm excited to step into the role of President with a renewed focus on executing our international growth strategy. I enjoy new challenges, and I'm ready to move the company to the next level. Everyone, please turn to slide number four of the PowerPoint presentation we have just published. As I cover a few highlights from the first quarter, we posted 145.5% revenue growth during the third quarter, delivered $36.7 million in Q1 2022. Our first quarter performance exceeded expectations as our team railed together to get as much product solutions out of the door before the COVID lockdown situation in China worsened. This is a robust revenue growth despite many macro happens. A big part of our growth in the first quarter was Asian Pacific. We have seen our market share in India increasing with our partners, and this was one of the biggest contributors to ex-China growth in the first quarter. As an example, we received a 10.1 million US dollar order for various eBus solutions from Oshkosh, Leland. In addition, orders from our multi-year European projects were strong across the new battery solutions that were recently announced. We ended the first quarter with a strong backlog of 120.8 million US dollars, a result of a healthy order intake of 62 million. We are very excited about the prospect of further increasing to our backlog in the coming quarters. our forecasted contract revenue remains at a healthy 2.5 billion US dollars. Except backlog, our forecasted contract revenue is compromised entirely of customers located outside of China. We continue to make progress behind the scenes to advance our relationships with leading OEMs globally, and we'll continue our efforts to grow our forecasted contract revenue. When we refer to forecasted contract revenue, we are describing backlog plus management estimates for revenue we expect to realize from existing contractual relationships with customers. Most of these contracts include estimate volume requirements. However, they do not typically include a volume commitment. We expect to realize current forecasted contract revenues between 2022 and 2031. The first quarter did come with some challenges. The most prominent one being rapidly increasing raw material prices, driven by supply chain disruptions as well as the worldwide inflation. We are actively monitoring these trends and doing what we can to mitigate this risk, including entering into long-term supply contracts, identifying new and or additional sources of supply, and increasing our selling prices wherever possible. However, this is a trend that we anticipate continuing well into 2022. In addition, I would also note that the semiconductor supply chain has not yet normalized, and there were further supply chain disruptions in the auto industry caused by the conflict in Eastern Europe. These challenges do not necessarily impact our business directly. However, they do impact the timing of the OEM demanding for our battery solutions. As many customers are unable to complete production of existing vehicles or finalizing the various vehicle testings in the development phase, due to chip shortages or other supply chain issues, which in turn delays demand for our products. I will touch on our capacity expansion projects more in a moment, but they are well underway. In addition, as was discussed during our last earnings call, we launched two new battery cells and a new battery pack during the first quarter, which will be a key driver of revenue growth going forward internationally. Please turn to slide number five which highlight some of our key partnerships in the commercial vehicle market, like IVECO Group, EVOSUM, and others. We are moving forward with our announced corporations and preparing right now our global battery production lines for various vehicle SOPs within the next 12 months. Next, please turn to slide number six, which outlines some of our incoming order activity in Q1. In addition to the 10.1 million order from Oshkosh Leland mentioned earlier, we also have a stable business growth with our existing customer base and partners like, as an example, Oshkosh, RightBus, ZF, or King Long in serial and new development projects with 51.9 million US dollar order value. Slide seven is an overview of the new power and energy battery cells and the battery pack we announced during Q1. These products enable our customers to optimize vehicle design in terms of energy density and cycle life, delivering overall improved performance and reducing the total cost of ownership by preserving fast charging capabilities. Both sales solutions are rated over 5,000 cycles at 25 degrees. We expect these new generation products to be critical drivers of our future revenue growth. Moving on to slide number eight. We have presented an overview of our engagement with TÜV SÜD that was announced last week. TÜV SÜD is a leader in the certification world, and we are pleased to partner with them on one of the first sustainable assessments in the battery industry world. TÜV SÜD has completed an analysis of our operation, which we'll use as a baseline to measure our progress towards sustainability goals going forward. This is very important. The next phase of the project will include a deep dive into identifying areas where we can improve sustainability in our manufacturing processes and in our global supply chain. I will now turn the call over to Craig to review our financial performance.
Leon
Thank you, Sascha. Before I take you through our Q1 financial performance, I would just like to personally thank Leon for all his years of hard work and devotion to MicroVast. I am fortunate to inherit from him a great finance team, that has global region capabilities. Additionally, Leon leaves me with a very strong balance sheet and an orderly and clean capital structure. As you know, we have exciting plans for our capital deployment over the next couple of years and beyond, and I'm excited by the opportunities that lay ahead for the company. Now, let me turn to our financials, and I'll spend the next few minutes discussing our Q1 2022 financial results. Please turn to slide 10 and I will summarize the main line items from our Q1 P&L. First off, revenue. I am pleased to report strong revenue growth in the first quarter, which grew 145.5% to $36.7 million from $14.9 million in Q1 2021. As Sasha mentioned, this performance exceeded our expectations and I will take you through the geographic breakdown in a later slide. We posted gross profit of $13,000 in Q1 2022 compared to gross loss of $1.2 million in the prior period. After adjusting for non-cash settled share-based compensation expense, adjusted gross profit was $1.9 million in Q1 2022 compared to adjusted gross loss of $1.2 million in Q1 2021. This translates into an adjusted gross margin of 5.2% in Q1 2022, compared to negative 8.3% in Q1 2021, a 13.5 percentage point improvement. Operating expenses were 43.4 million in Q1 2022, compared to 11.5 million in the prior year period. The largest contributor to the increased operating expenses was share-based compensation expense, which totaled 26.2 million in the quarter. Of this SBC expense, $14.3 million is non-cash, and the balance is currently expected to be settled in cash this year. Operating expenses also increased as the company added a headcount to support the planned growth initiatives and also incurred additional expenses related to operating as a public company compared to the prior year period. Net loss was $43.8 million in Q1 2022. compared to net loss of 16.3 million in Q1 2021. After adjusting for non-cash settled share-based compensation expense and changes in fair value of our warrant liability and convertible notes, adjusted net loss was 29.1 million in Q1 2022 compared to 12.7 million in Q1 2021. Adjusted EBITDA was negative 23.1 million in Q1 2022 compared to negative $6 million in Q1 2021. Reconciliations of these non-GAAP metrics to the most comparable GAAP metrics are included in the tables at the end of our earnings press release. Slide 11 further illustrates the impact of these adjustments. As I just mentioned, we have substantial SBC expenses in Q1 of $26.2 million that is primarily related to stock option and capped RSU awards under a plan that pre-existed our D-SPAC merger. Because of a modification made to these awards, we are required under GAAP to expense this to our P&L over a three-year period starting from July 23, 2021. We have adopted a prudent approach of only adjusting for the non-cash settled portion of this SBC expense. Slide 12 shows a geographic breakdown of our revenue in Q1 this year compared to last. As you can see, on a percentage basis, the biggest growth was in Asia Pacific ex-China, at a growth of 628% year-over-year. As Sasha mentioned, this was primarily driven by deliveries to leading OEM customers in India. It is worth noting that our China business still posted an 86% year-over-year growth, and we expect that while this will remain a growing market for us, we currently expect the contributions from customers in Asia Pacific, Europe, and the U.S. to grow at a faster rate. I will now take you through our funding position and the cash movement in Q1 2022, which is on slide 13. We started the quarter with $536 million in cash, cash equivalent, and restricted cash. Net cash used in operating activities during the quarter was $24.9 million, which was primarily due to increased notes receivable and inventory due to our higher sales, as well as a management decision to pay for certain raw materials earlier than usual in order to secure lower prices from our suppliers. Our capex spent on HUJO 3.1 and CLOPS for 1.1 was $38 million during the quarter. And we also invested a further $2 million into our existing facilities and R&D. This gives us approximately $470.7 million in cash, cash equivalents, and restricted cash at the end of Q1. Management estimates for our total capital expenditures in 2020 to remain in the region of $300 to $350 million. with most of this being allocated to our capacity expansion projects, which will bring online an additional four gigawatt hours of capacity per annum. These expansions, which are our growth drivers for the coming years, are fully funded from our current balance sheet capacity. We will also be opportunistic to bring in bank financing. We have a growing fixed asset base that is unencumbered, and our current debt levels are very low. As regards to asset base, our capacity expansions are underpinned by our large and growing forecasted contracted revenues, which will bring incremental cash flows in the future. To round off, we close the quarter in a very strong cash position, and with flexibility across our balance sheet and capital structure to raise more capital. That will be done at a time that best suits us, and as it's needed to support future growth beyond our current four gigawatt hour expansion. With that, I will turn it back over to Sascha to review the outlook. Thanks, Craig.
Wu
Lastly, please turn to slide 15. First, an update on the construction progress related to our ongoing manufacturing capacity expansions. Our manufacturing facility in Huzhou is located in a near boring province to Shanghai, and thus far has not been directly impacted by the COVID lockdowns in China. I'm pleased to report that the ongoing construction related to this project remains on schedule and is on track to begin serial production by the first quarter of 2023. We expect production to begin ramp up in Q4 2022. We posted an updated time lapse to our social media accounts last week, which shows that the facility has reached 90% completion on the exterior side. This is an impressive feat against the backdrop of a difficult environment in China during the last few months. In addition, our ability to produce battery solutions was not immediately impacted from the lockdown, and we have been able to continue production from our existing raw material inventory in Huzhou. However, logistics have created many challenges in getting products out of the door in Q2, both on the ground as well as by sea. In addition, as April progressed into May, it has also become increasingly challenging in the timely replenishment, production, and raw materials due to supply chain disruptions impacting our vendor as well as our tier network. We expect these challenges will be temporary in nature, and as of right now, we believe we can make up the softness experienced during the first half of Q2 once logistics normalize. We have finished goods in our warehouse that are ready to be shipped as soon as transportation can be arranged. We will continue to monitor this situation closely. We expect Clarksville to begin serial production in Q3 2023. Clarksville is well on its way to meeting USMCA requirements, which will give us a competitive advantage in North America. These global extensions will add additionally four gigawatt hour of production capacity per year and will be mostly dedicated to our recent announced larger format battery cells. Moving forward, A key part of our strategy is to continue to focus on our manufacturing capacity expansion efforts outside of China. A critical component of this strategy is diversification of our supply chain as we diversify our geographic presence and customer base. Once completed, these efforts will help insulate microbus from regional disruptions in the future. Moving to the 2022 outlook, please turn to slide number 16. We experienced some challenges early in 2022. However, we are maintaining our guidance of 35% to 45% revenue growth compared to 2021. We continue to be very optimistic about our opportunities to grow forecasted contract revenue this year and are looking forward to the full deployment of our newly launched product to further drive international sales growth. At the same time, we will further explore the market for energy storage solutions. This market was valued in 2020 at $10.37 billion and is projected to globally reach $37 billion in 2027. We will also take advantage with our high-performance battery solutions in the upcoming and growing fuel cell market. The market for fuel cell applications is projected to grow to $9.1 billion by 2027 versus $2.9 billion in 2022. Our fuel cell battery cell solutions have been already tested in very harsh desert conditions beginning of this year. Long-term, we look towards a positive future, with political leaders across the global coming together to reduce their country's carbon footprint and signing off Paris Agreement or releasing the new Fit for 55 European legislation package that has given a boost to green and renewable technologies. By the way, we are also exploring opportunities to participate in some of the recently announced governmental funded electrification projects in the United States as well as in Europe. With that positive outlook, I will turn the call back over to Sarah.
Sarah Alexander
Thank you, Sascha. I would now like to ask the operator to open up the line for question and answers.
Operator
Thank you. We'll now begin the question and answer session. To join the question queue, you may press star then one on your telephone keypad. You'll hear a tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then two. Our first question is from Adam Jonas with Morgan Stanley. Please go ahead.
Adam Jonas
Hi, everybody. Thanks for the call. Thanks for the details. I got your full year CapEx outlook, but could you also provide any magnitude or cadence of OpEx as well, particularly what would consume cash? Any visibility you could provide there would be very helpful. Thank you.
Leon
Sure, Adam. Craig here. Not a problem. I think it won't come as a surprise to you that we'll run some cash outflow this year. I think You know, our best estimates for that is that cash outflow from operations will be in the region of about $50 million. Q1 was slightly higher than we'd anticipated because we took the decision to buy a lot more raw materials. You saw that from the inventory going up and our notes receivable. That is an indicator for you that it won't be like that for the rest of the year. That was a tactical management decision to go into the market earlier on raw materials.
Adam Jonas
Okay, I appreciate that. And obviously, given the cash projections and the cost of the expansion in Hozu and Clarksville with your cash position, I would imagine you'd be getting down to... what you would define as minimum cash levels within a couple of quarters. I didn't know if you wanted to, I really, you know, obviously you're, you're exploring lots of different options and there's, there's all sorts of exciting opportunities to get low cost financing from grants and the DOE and others, but for another time perhaps, but, but can you remind us what, what you would say would be a comfortable range of, minimum cash to run the business before you bring in some new outside funds?
Leon
Yeah, I think it's very similar to what Leon mentioned last time, that we're looking to always have minimum cash around $150, $200 million. Just so you know what we're doing with the balance sheet, Adam, it's this. We've got cash And then we're converting that cash into productive assets, fixed assets, right? So once we do that, our fixed asset basis goes up. It's unlevered. And our fixed assets are backed by cash flows because we've already got the technology. So as we do that, we've then got the flexibility to add debt financing. And that's a lot easier for banks to do because you've done what you promised to do. You build the building. Yeah. You put the equipment in there. They see the customers come, and they're not just looking at a LTV on a building. They're looking at, like, what's the cash flows associated with it, and that's a nice position that we're in.
Adam Jonas
Makes a lot of sense. I look forward to meeting you, and thanks for the details.
Leon
Yeah, I look forward. Come to Houston anytime. We'll see you in New York next time as well.
Adam Jonas
You got it. Thanks. Okay. Thanks. Thanks, Adam.
Operator
As there are no further questions, I'll turn the conference back over to Sasha Kelterborn for any closing remarks.
Wu
Thank you all for joining today, and we wish you a great and pleasant evening. Thanks a lot.
Operator
This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.
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