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Operator
Greetings and welcome to the MicroVAS Holdings fourth quarter 2022 earnings call. At this time, all participants are in listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to our host, Cassidy Fuller, Investor Relations for MicroVAS. Thank you. You may begin.
spk01
Thank you, Operator, and thanks to the audience for joining us today. Wayne Yu, Founder, Chairman, President, and CEO, Sasha Kettleborn, Chief Revenue Officer, and Craig Webster, Chief Financial Officer, will host today's call. Ahead of this call, MicroVAS issued its fourth quarter and full year 2022 earnings press release, which can be found on the Investor Relations section of the company's website, ir.microbast.com. In addition, we have posted a slide presentation to the website to accompany management's prepared remarks. As a reminder, please note that management will be making forward-looking statements on this call. These statements are based on current expectations and assumptions and reflect the company's view only as of today. They should not be relied upon as representative about views as of any subsequent date and management undertakes no obligation to revise or publicly release results of any revisions 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 the company's financial results, please refer to Microvast's filings with the SEC. including the annual report on Form 10-K and 8-K filed earlier today. In addition, during today's call, management may discuss non-GAAP financial measures, including adjusted gross profit, adjusted net loss, and adjusted EBITDA, which the company believes are useful as supplemental measures of micro-GAAP 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 metrics in the tables included at the end of the company's press release. A webcast replay of this call will also be available on the investor relations section of Microbeth's website. With that, I will turn the call over to Mr. Wu for some opening remarks.
Wayne Yu
Thank you, Cassidy, and thank you all for joining us today. I would like to start off with a high-level overview of the quarter. Before providing the key highlights for 2022, I will then turn the call over to Sacha Calabon, our Chief Revenue Officer, who will discuss some of our key wins in the quarter, followed by Craig Webster, our Chief Financial Officer, who will discuss our financials in more detail. I will then address our outlook for 2023 before opening the call-up to your questions. Please turn to slide three as I cover a few highlights from the first quarter of 2022 and the full year. We recorded revenue of $64.8 million in Q4 2022 and $204.5 million for the full year. We ended the fourth quarter with a record backlog of 410.5 million, driving by a robust order intake of 364.7 million, led by the large win we announced in December for our Energy Storage Division, or ESS, and a strong demand across multiple commercial vehicle platforms in Europe. We are proud of our achievements last year and are looking forward to executing on the many opportunities ahead of us in 2023. Some of our most notable achievements last year include the establishment of the Microvirus Energy Division in Colorado and the introduction of our new ESS container offering. This expands our addressable market to include energy storage sector, where annual deployments in the US alone reached to 13.5 gigawatt hour in 2022, and our large 1.2 gigawatt hour utility scale project has been a big boost for our push into this market. In our commercial vehicle business, we expanded our partnership with EVeco, one of the largest commercial vehicle manufacturers in Europe, for a number of additional vehicle platforms and expect to ramp production and begin deliveries this year. We were also selected for a $200 million grant by the U.S. Department of Energy to build our most advanced high-temperature separator plant in the United States to help enhance battery safety for the industry. And we continued to expand our industry leading technology. We introduced our 53.5 amp hour high energy cells and began initial shipments in the fourth quarter. We anticipated this solution to be a key driver of our growth in 2023. led by demand across commercial vehicle applications, including light commercial vehicles, electric buses, or e-bus, and commercial trucks, as well as ESS. To meet this demand, we expanded our production capacity in Huzhou by adding a fully automated two gigawatt hour cell module and a pack line dedicated to the production of 53.5 amp hour battery products. And our two gigawatt hour capacity expansion at our new U.S. facility in Clarksville, Tennessee is in full construction mode with start of production targeted for Q4 this year. I would now like to turn the call over to our Chief Revenue Officer, Shasha Kelleburn, who will discuss some of our key wins and achievements in the quarter.
Craig Webster
Thank you, Mr. Wu. I would like to start by reviewing some of our key wins during the fourth quarter. Besides the already mentioned highlights from Mr. Wu, I would like to mention further on slide five that Calma and Microbus have extended their supply and purchase agreement through 2026. We are proud to support Calma on their global electrification journey with our new Gen 4 packs. With our technology roadmap and deep understanding of Calma's heavy-duty business, we look forward to many more years of close cooperation. Please turn to slide 6, which highlights some of our key awards in the commercial vehicle market. We have four major highlights to share that reflect the diversity nature of our presence in the market. Starting with our ongoing strategic partnership with the French-based technology company Grossois, that offers one- and on-road zero-emission smart vehicles for freight transportation and people mobility. The Gosson ATM, as an example, is a full electric yard tractor designed for deployment in distribution centers, logistic hubs, container depots, and other industrial applications. It has a loading capacity of up to 38 tons. The ATM will be powered by Microwave's high-tech Gen4 battery packs. Thanks to our strategic cooperation with CNAG Industrial, a vehicle group Our batteries are now powering their new prototype of the New Holland agriculture tractor, which will be produced starting late 2023. Our Gen 4 battery pack solution allows us for non-stop daily operations and can charge to 100% in one hour. Then we have our battery supply agreement with RE Automotive, which is aiming to revolutionize the future of commercial vehicles with its innovative full electric skateboard platform. Our Gen 4 battery pack is designed to address the requirements of commercial vehicle fleets which our partner RE Automotive is targeting. The newly deployed Gen 4 battery packs contain microbus high-energy 53.5-ampere-hour pouch cells. The Gen 4 battery packs will meet cross-regional battery standards such as ECE Revision 103, GB 38031, and UL 2580. Additionally, the outlook for ongoing business with our customer Dongfeng Trucks, China's leading truck brand, is very promising. Especially for the hybrid heavy-duty truck segment, our new Gen 4 battery packs with 48Ah cells will play an important role. Now please turn to slide 7, which displays our major orders in Q4. We received a nearly $10 million order for a cargo handling application from Marfi Trepel, a German-based leading manufacturer of industrial trucks for the transport of heavy payloads, including for airports, seaports, logistics, and distribution centers. We remain very active in India. Light-medium commercial vehicle is predicated as the next frontier for the electrification in India due to the surging energy costs and propelled by the steep demand projections in mid-mile and last-mile transportation business. The Indian market will experience a doubling in light-medium-duty vehicles sales within the next 15 years. Similar developments can be observed with e-buses, where the share of e-buses of the overall bus fleet is expected to reach over 40% by 2040. To reinforce our standing in the Indian market, Microbus has established strategic partnerships with two of the leading commercial vehicle manufacturers, Our customer, Switch, with their eBus and light commercial vehicle portfolio, as well as JBM with their bus portfolio, are well positioned to meet the growth. During the fourth quarter, we received an order in excess of $6 million from Switch, a subsidiary of Asha Pleeland, for an eBus application in India, where Microvast is an exclusive supplier. In addition, we are working with JBM Group to leverage further growth opportunities in the Indian eBus sector, using our fast-charging batteries, allowing for up to 300 kilometers daily commutes. Furthermore, we are the new battery supplier for the Iveco Crossway, produced by Iveco Bus. The new Crossway uses our industry-leading high-energy-density battery pack system iPack, ranging from 400 to 466 kWh, accelerating Iveco's transition to zero emissions. During the quarter, we also continue to benefit from ongoing orders from Ashcroft Leland, Iveco Group, ZF, Shell, and others. Our strategic partnership with IVECO Group continues to strengthen, and we expect it to expand in 2023 and beyond. The IVECO eDaily is now available for the European market and has already won the One to Watch Award, while IVECO Bus has issued multiple press releases announcing municipality tenders. It has won using microbus battery solutions. For 2023, in addition to delivering on these projects with IVECO, we are looking to grow our business with them across other vehicle platforms and projects. We have multiple initiatives to further grow our commercial vehicle business in the US. For example, we are in the process of finalizing a strategic partnership with a proven market-leading specialty OEM. Our high-power, long-life, high-charge-rate battery technology is a perfect fit for mining applications. We see tremendous opportunities in this segment and are currently executing our recently announced technical partnership with a consortia led by Shell to support the decarbonization of the mining industry. We will provide high-powered battery solutions with ultra-fast charging capabilities in support of a modular truck being designed for the mining industry. Production deliveries are expected in 2025. In the commercial truck segment, we have an exciting partnership in the works with a leading global truck manufacturer for a medium-duty application in the U.S. Testing is expected to be completed this summer, and a formal customer commitment is anticipated later this year. As we noted over the last few quarters, raw material prices remain at elevated levels as a result of supply chain disruptions as well as worldwide inflation. Our unit costs across the board continue to track significantly higher than we anticipated at the beginning of last year. In the second half of 2022, we implemented mitigation strategies, including optimization, longer-term supply contracts, identifying new and or additional sources of supply, and increasing our selling prices wherever possible. However, we continue to expect raw material prices, especially for certain key materials like lithium, to be volatile through the end of 2023 and possibly all the way in 2024. Over the course of 2023, we expect our order volume to increase meaningfully as we ramp up our new manufacturing capacity in Huzhou, securing additional ESS wins and bring new manufacturing capacity online in Clarksville. I will turn the call over to Craig to review our financial performance.
Wu
Thank you, Sasha. I'll spend the next few minutes discussing our Q4 2022 financial results. Please turn to slide 9. I will summarize the main line items from our Q4 P&L. We recorded revenue of $64.8 million in Q4 2022, which is down slightly from $66.8 million in Q4 2021. The year-over-year decrease was due to a delayed order shipment that we will recognize in Q1 2023, along with currency headwinds. On a full year basis, despite facing continued challenges from COVID lockdowns in China, and dealing with high infection rates in our Huzhou facility, as China's zero COVID policy was abandoned, we achieved revenue of 204.5 million, up 35% from 152 million in the prior 12-month period. We posted gross profit of 2.2 million in Q4 2022, compared to gross profit of 1.2 million in the prior period. a 93% improvement. On a full year basis, our growth profit was $9.1 million compared to a growth loss of $42.7 million for the prior year, a 121% improvement against the prior year. In Q4 2021, we provided for higher warranty costs associated with the legacy product, which was not repeated in Q4 2022. Our growth margin for full year 2022 was 4%, whereas in the prior year it was negative 28%. Operating expenses were $37.3 million in Q4 2022 compared to $52.2 million in Q4 2021. The largest contributor to the decrease in operating expenses was the decline in our share-based compensation expense, which totaled $16 million in the quarter compared to $22.6 million in Q4 2021. As mentioned previously, Non-cash share-based expenses were a large contributor to the increase in GAAP operating expenses and operating loss. Full year 2022 operating expenses were 170.7 million compared to 157.4 million in the prior year, an 8% increase. GAAP net loss was 33.7 million in Q4 2022 compared to net loss of 46.6 million in Q4 2021. GAAP net loss of full year 2022 was 158.2 million, compared to a net loss of 206.5 million in full year 2021. We believe a more accurate representation of our financial performance, especially as it relates to cash operating expenses and operating loss, is as illustrated in slide 10. After adjusting for non-cash settled share-based compensation expense in their cost of sales, Adjusted gross profit was 4.2 million in Q4 2022 compared to adjusted gross profit of 3.1 million in Q4 2021. This translates into an adjusted gross margin of 6.4% in Q4 2022 compared to 4.7% in Q4 2021, a 1.7 percentage point improvement. We were pleased to see another quarter of gross margin improvement despite higher raw material prices. This demonstrates our continuous efforts throughout the year to improve our long-term gross margin. When making the same adjustments for full year 2022, our adjusted gross profit was $16.8 million compared to an adjusted gross loss of $38.5 million in full year 2021. This translates into an adjusted gross margin of 8.2% in full year 2022, compared to negative 25.3% in full year 2021, a 33.5 percentage point improvement. After adjusting for non-cash SBC expense in SG&A, our adjusted operating expense in Q4 2022 was 21.4 million compared to 39.6 million in Q4 2021. When making the same adjustment for full year 2022, our adjusted operating expense was 96.5 million compared to 97.6 million for full year 2021. After making those non-cash SBC expense adjustments and accounting for changes in fair value of our warrant liability and convertible notes, adjusted net loss was 15.9 million in Q4 2022, compared to 33.4 million in Q4 2021. On a full year basis, adjusted net loss was 77.3 million in full year 2022 compared to 135 in full year 2021. Reconciliations of these non-GAAP metrics, the most comparable GAAP metrics, are included in the table at the end of our earnings press release. Slide 11 shows the geographic breakdown of our revenue for the 12 months ended December 31, 2022 compared to the prior year period. As you can see, our two largest markets for Asia, Pacific and China, growing 38% and 42% respectively year over year. Revenue in our European business declined 19% as the 12-month period ended 2022, compared to the prior year period, mainly due to the delayed start of customer projects. However, we expect sales in the region to see a strong rebound in 2023 as these projects begin to ramp up. We are pleased to note that a good percentage of our backlog is from European customers who are launching electrified models for the first time and should achieve year-over-year volume increases using our technology, especially the 53.5 amp power cell. Revenue in our U.S. region for full year 2022 hosts a strong 298% growth rate compared to full year 2021. We have very high expectations for U.S. revenue growth in 2023 and beyond, and are ideally positioned to meet the opportunities in the U.S. market from our Clarksville facility. The award of the 1.2 gigawatt hour ESS contract, one of the largest of its kind in the U.S. to date, has accelerated our business plan for microlapse energy. That project is utilizing our ME4300 container solution with a 53.5 amp power cell allowing each container to deliver 4.3 megawatt hours of energy. With that energy density, we estimate that our battery solution allows for 30% fewer containers relative to those from competitors. This gives the developer a smaller construction footprint cost, easier and faster installation, and reduced maintenance with far fewer containers to maintain over the life of the project. Additionally, the energy retention performance of our cells far outperforms those of other suppliers. Given the clear performance benefits of our ESS container, the utility-scale energy market in the U.S. is a huge opportunity for us. By 2030, it's estimated 396 gigawatt hours of energy storage capacity will be added in the U.S. alone, with around 70% of this being projected for energy-shifting applications. I will now take you through our funding position and other significant metrics from our 2022 financial performance. as you will see on slide 12. We ended the year with a cash position of $327.7 million, comprised of cash, cash equivalent, restricted cash, and a short-term investment. We never banked with Silicon Valley Bank and have no exposures as a result of its collapse. Our cash position gives us a very strong balance sheet to execute our 2023 plan, especially our 4 gigawatt hour of capacity expansion, which will come into production given as an additional 1 billion of revenue potential. We also closed the year with a very healthy backlog of 410.5 million, which is our highest total to date. This underpins our conviction that 2023 will be the start of many high growth years for Myfabath. Our high energy 53.5 ampere cell makes up over 80% of this backlog, and we expect to realize margin improvements as we further scale this technology. U.S. and European projects account for approximately 90% of our backlog, and we will see a much more even distribution of our revenue by region in 2023 compared to 2022. Although Asia Pacific and China only currently account for approximately 10% of our backlog, these regions were a $185 million business for us in 2022, and we expect these regions to have another strong year in 2023. Moving on. Capital investments we made in 2022 totaled $128.7 million and were predominantly utilized to bring the additional 4 gigawatt hours of capacity online that I just mentioned. We estimate that capital expenditure for the first quarter will be in the range of $50 to $75 million and will primarily be used for milestone payments on completion of our Hoosier expansion, ongoing construction at Clarksville, and our upcoming plans to use Mexico as an ESS container assembly hub. We will provide more details on this Mexico project in our Q1 update. As we mentioned previously, we fully expect Clarksville to be a direct beneficiary of Section 45X IRA credit. It should also qualify as domestic content for all of our U.S. customers. Looking ahead, we see 2023 as a standout year in which we will be able to demonstrate tangible and material results from the R&D initiatives and capital investments we made in prior years. With that, I will turn it back over to Mr. Wu to review our outlook.
Wayne Yu
Thanks, Craig. Please turn to slide 14. Based on strong visibility from our backlog position, along with positive industry tailwinds pushing electrification forward in our key markets, we expect to achieve very strong year-over-year revenue growth in 2023-2022. of 65% to 75% or total revenue in the range of 336 to 358 million. As Craig just mentioned, our backlog is mostly composed of orders from customers in Europe and the United States. And it's driving by our recent introduction of 53.5 amp power high energy cell. They recently announced 1.2 GWh ESS project and the ramp-up of multiple commercial vehicle projects in Europe. In the first quarter, we expect to begin deliveries of our 53.5 A cell from our new fully automated line in Huzhou. In the second half of the year, we anticipate starting deliveries of our ESS containers from our Mexico assembly plant. And in Q4, we expect to have an additional two gigawatt hour capacity up and running at our Crossville plant on the fully automatic production lines dedicated to the 53.5 amp power cell. As a result, we anticipated closing out 2023 with seven gigawatt hour total production capacity, including four gigawatt hour dedicated to the manufacture of our new 53.5 amp power high energy cell. We expect to add a significant into our backlog over the course of 2023 with orders from our commercial vehicles and ESS customers. Once our 2 gigawatt hour class fail expansion is up and running, we will begin to realize the benefits of Aira, which equated to $45 per kilowatt hour on all cells and modules produced. On two gigawatt hour of production, that has a potential of 90 million per year in IRA credits. We will also progress our separator business in 2023. And by the end of this year, anticipate having 10 million square meter production line for our polyaluminum separator operation. In parallel, we will also be working towards its full-scale operation in the United States starting in 2025. All of those initiatives position us well for continued strong revenue growth over the coming years, which we believe will enable us to achieve profitability in the next two to three years. I'd like to finish by saying that at the start of 2023, this is the strongest position that my company has been in. We believe that the market has finally caught up with our technologies. Customers have been testing the 53.5 ampere cell since 2021, and we started to receive multi-year orders later that year. We then started to initiate our capital investments to meet the demand and those will be finished this year. All the foundations are now in place to see the large-scale industrialization of our technologies, which puts us in a very strong competitive position as we enter our multi-year high growth phase. With that, I would now like to turn the call over to your questions. Operator, please provide instructions for the Q&A session.
Operator
Thank you. And ladies and gentlemen, at this time we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Once again, to ask a question, press star 1 on your telephone keypad. Our first question comes from Colin Rush with Oppenheimer. Please state your question.
Colin Rush
Thanks so much, guys. I've got a handful of questions, but can we start with just giving us some insight on what specific customer needs are being met with the 53.5 amp hour cell and why demand is so strong with that product?
spk00
Hi, Colin.
Wayne Yu
Sorry. A good question, Colin. You know, this is Yong Wu. To answer your question, you know, the 53-point amp hour is especially designed for, you know, the commercial vehicle and the well-balanced for the long life and fast charging capability. And, you know, this is going to be a... primary, you know, products to deliver to the commercial vehicles. For example, you know, the EV vehicle group, they choose most of their platform is going to use this product. This product's given very long life, and we put a long life, 5,000 cycles, you know, on our spec sheet, and actually testing is much longer than that. You know, right now we have the testing data reached to 4,000 cycles, And the battery still maintains 95% performance, which is amazing. And we moved this product to ESS energy storage, you know, the application. Since the energy storage application only have 0.25C, like a four-hour system, and 0.25C, you know, the charging and discharge rates, and this given, The battery much, much longer life. We simulated, you know, the, we never tested for, you know, 10,000. There, that's, that take us, I guess, you know, five, six years for testing. And, but we simulated, you know, the, the lifespan is going to over 10,000 cycles, which, which, you know, the, with this high energy density. And the energy density is relatively higher than the competitors, you know, in this, you know, the same category. It's a long life. It's much longer. That's why, you know, if you see we're using an ESS container, it gives us much higher energy density and 30% less number of containers you're going to install. The customer installs it in the field. And we will see the market is going to very much welcome this product in the coming years.
Colin Rush
Perfect. Thanks so much for that. And just on the ESS side, can you guys speak to the scope and scale of the sales pipeline that you're seeing already and how you expect those opportunities to move through the sales pipeline towards closing those sales?
Wayne Yu
For sales pipeline right now, to be honest, we do not have enough capacity to supply. We need a bunch of money to expand the factory, the app. And our factory, we have a lot of projects lined up, looking for products. And our ESS, you know, we couldn't sign more contracts. And that's the situation.
Colin Rush
Got it. That's super helpful. So just speaking of the CapEx funding, can you talk about how mature your conversations are around potential equipment finance or other options for asset-backed financing for that expansion, particularly in the U.S.? ?
Wayne Yu
Craig, can you answer that question?
Wu
Yeah, absolutely. Colin, good to hear from you. CapEx-wise, do you want a summary on what we've got? Do you want to promote the whole top way down, like available cash, CapEx this year?
Colin Rush
I think that's pretty clear. Mostly what I'm looking at is any sort of debt or asset-backed instruments that you guys are thinking about to support some of that capex here this year to offset some of the pressure on your cash balance?
Wu
Yeah, sure. I don't think that we've got that much pressure on the cash balance, Mindy. We mentioned before, and it's what we did in Hoosier, right? So once we've gone through the construction phase and it's de-risked and we can show banks that you've got contracted cash flow, then we will look to put in really conservative financing. So we Later last year, we closed that 1.11 financing line for the WHO show capacity. That was at a 4.8% interest rate. I'm hearing some echo on the line. Can you hear me clearly? Yep, we sure can. I just heard somebody else. If they can go on mute, please. So, you know, we've still got 75 million left to draw on that. That fully funds the remaining amounts gone who show. Then, you know, on Clarksville, you know, what we're seeing now, just what Uzong alluded to, is it's more of a production capacity challenge, right? So we're bringing two gigawatt hours up this year in Clarksville. The backlog that we have already... we said it is like 410, most of that's for the 53.5 amp power cell. So when we look at available capacity in 24, the ESS contract we have, the projections from commercial vehicle customers, going into 24 will already be full in Clarksville. And you've seen the data we've given you. It's because the energy storage market in particular is growing so fast, you know, in the US. So, you know, already we're looking to put in place additional capacity, you know, a further two gigawatt hours. Financing to do that, I think it's easy structure-wise. There'll be some senior secured financing on the first phase. And then, you know, what we can do on that second phase where there's no construction, it's just equipment. You know, we add some equipment. That equipment cost to add is, worst case, you know, $150 million. And then in terms of the cash flows, you've got the cash flows from your customers. But the real kicker in this is that, you know, as Uzong mentioned, two gigawatt hours gets you $90 million a year in IRA credits. Then we add two gigawatt hours that might cost that equipment cost I just mentioned. With your IRA credits, you're getting that, you know, you're paying it back in two years. And Really, that's what I was doing for this sector is it's incentivizing us all to add the capacity, make sure you've got customers, which is what we're proving, right? And then your payback periods are shortened.
Colin Rush
Perfect. That's super helpful, guys. And just the last one, in terms of some of the raw material inputs and the price pass-through and how it's impacting gross margin, can you talk a little bit about where you're at in terms of your ability to pass on some of those higher prices that we saw late last year and the cadence of gross margin improvement as we move into the balance of 2023. That's it for me.
Wu
Sascha, do you want to talk about customer engagement on that, and then I can pick a bit more on gross margin improvement at the end, if that's all right?
Craig Webster
Yes, sure. I will do that. Colin, nice to have you on board here. So generally speaking, with most of our customers, we do have raw material price clauses in place. So first of all, speaking about that, and it's not about the question, can we raise prices? It's more about finding common grounds and moving ahead with that. Everybody knows that the raw material prices went up, and everybody knows that the situation will level back to a normal level. And at the end of the day, it is like we have a lot of strategic projects in front of us, So we have strategic partners, and with strategic partners, we always have strategic pricing at the end of the day. So we look forward in a positive way. It's not like that we cannot pass on these raw material increases at the end. It's an intensive discussion, but at the end of the day, we are all on the same line, also with our end customers.
Wu
Okay, thanks so much, guys. Colin, sorry, I'll just add a little bit, you know, on the gross margin, you know, because it's really relevant. You know, I mean, this year we did adjust at 8.2%, and, you know, it's pretty fair. You know, we adjust out that non-cash SBC expense from production. It's not true production cost. Now, to do that, we made nine different sales this year to get to that. It's just at 8.2%. Now, this is a real good thing that we're highlighting on the backlog. Like over 80% of the backlog is 53.5 amp hours. So the gross margin improvement is going to come from the introduction of that cell and then as we scale it, right? And what we're pointing you towards is let's assume, and I hope you can make the assumption, we'll give you the forecast, we'll give you the backlog, we've told you what the Asia Pacific and China business was and how not much of that is in backlog. So I think we're telling you that we're really confident on 23. Let's start to think through how do we get to profitability in 24. Now we end the year, you know, we have a billion dollars of revenue potential and 53.5. Now I'm not saying it's going to be at a hundred percent utilization in 24, but it's going to be a high utilization because of the, The demand we have, demand that's being created by how good that technology is. So let's say we can get to 75% utilization in 24. That's $750 million just on 53.5 Ampere alone. Given where we are with demand and how tight our capacity is, I think we can make about $150 million gross profit. And then our job as a management team to manage our cash operating expenses like through to that time. Now, they've got to grow because we're in high growth phase. But I think realistically, we can manage them to about 150 in 24. And at that point, you're getting to break even. And I didn't even put any iron numbers into that 24.
Wayne Yu
Yeah, Collins, for the cost control side, most of the costs come from raw materials. Since we have one single product, you know, with big volume, this gave us a lot of negotiation power with our suppliers. So now we have a long-term contract, you know, the fractured with the lease on index, and we discounted from lease on index, which guaranteed, you know, our profitability. That's very good. We never had this before because we used to have lots of different products in a small volume. Right now we have one single product. one supply source, and firm up all the supplies.
Colin Rush
Perfect. Thanks so much, guys.
Operator
Thank you. And just a reminder to the audience, to ask a question, press star 1 on your telephone keypad. To remove yourself from the question queue, press star 2 on your telephone keypad. Our next question comes from George Giannarikos with Canaccord Genuity. Please state your question.
George Giannarikos
Hey, good afternoon, everyone. Thanks for taking my question. I'd like to start with the energy storage market. I'm curious as to how you were able to put all the pieces together and turn around the product so quickly. Thank you.
Wayne Yu
Thanks. Good question, you know. And I constantly ask myself that as well. And, you know, actually the battery itself, And the battery technology we put on the vehicle is, you know, is testing for a long time already, like three years testing. And, you know, the vehicle application is much, much difficult than container. Container is never moved. Vehicle is vibrating, you know, moving in different conditions. And you set the product in the container. We have similar modules, you know, set in the container. It's it's pretty easy. And we have experience to put it on the vehicle. That's why we set up a manufacturing in Mexico to take advantage of the low labor costs to make it more competitive also. And at the border of Mexico, the Mexicali is very close to most of the ESS application fields, which is in the southwest outskirts of the United States. Thank you.
George Giannarikos
Great. And maybe as a follow-up, could you kind of help us understand the potential margin difference between the U.S. businesses and other geographies?
Wu
Sure. Uzong, do you want me to take that one?
spk00
Yeah.
Wu
Yes. I'd say, George, a lot of it really comes down to the IRA benefits. You know, unless, you know, the EU announces something similar, you know, what we're getting is, you know, Clarksville production, you know, Clarksville does both cell and module. So we're getting $45 a kilowatt hour. And, you know, what you translate that through is probably a 15 to 20 point uplift in your gross margin. And then the other part of it is just how incremental it is to cash flows because, you know, what we see is maybe a, you know, as short of a two-year payback on your capital investment. So, you know, you've essentially got free cash flow after that.
George Giannarikos
Great. Thank you, everyone, for taking my questions. Have a great day.
Wu
Thanks, George.
George
And this is Monica Gould, Investor Relations for MicroVast. We do have a few questions that came in through the web, and we'd like to ask those now. So first, is your Clarksville capacity spoken for already?
Wu
You just broke up a little bit at the end, Monica.
Wayne Yu
The question is a classical, you know, classical factory will be ready at the end of this year scheduled. And we are on the fast speed, you know, for the construction. And the equipment is fabricated in China. And I went there last week. I saw all the equipment laying on the floor, you know, for FAP and the factory testing, you know, the FAP. Right now, you know, after factory testing, you know, it's qualified and, you know, we're going to ship it. Ship to U.S. and install in U.S., you know, the expectation, you know, is going to be end of this year to produce the battery.
George
Okay. And I'm sorry, I'm not sure if you heard me clearly enough, but the investor was asking if the capacity is spoken for already.
Wu
Yeah, getting very close to spoken to already for two gigawatt hours, and we're already planning to add an additional two gigawatts, and when we do that, it's based on actual contracts.
George
Okay, great. So another question that came in is about the current status of the DOE grant, if you could talk about that.
Wayne Yu
Yeah, the DOE grant that we are working on, you know, right now it's – It's very close to close the deal and it's in the contract negotiating stage. We still need to engage the contract with DOE. We are in the first batch of the negotiation and we'll see the results soon.
George
Okay, great. I think we addressed this mostly in the prepared remarks about our China 3.1 expansion. capacity if that's producing cells already and when we'll begin production. But maybe you just want to review that one more time.
Wayne Yu
Yeah, I'm in the China factory right now and we have a little bit delay maybe in the end of this month. We already produced the first cell. We just need, you know, the ramp up. Slowly ramp up, you know, to ensure the process. To reach the full production, you know, design and production, you know, takes a few months. And we are producing small volume right now.
George
Okay, great. And the last question, going back to gross margin progression 2023, the investor was curious about the impact of the automated production on a gross margins.
Wu
I think we'll definitely see it, but let us show you the actuals from Q2, Q3 onwards. As we just said, we're really looking now to focus around one core technology on fully automated lines, efficiency of production planning, negotiating with suppliers, and we're confident that we'll report that progression throughout the year.
George
Terrific. And the final question has to do with our 2023 guidance and how much of that, what's the assumption for ESS in the guidance?
Wu
Is about around 20 to 25% is ESS. The rest is commercial vehicles. So commercial vehicles still growing like really positively. And, you know, as we mentioned, you know, we still expect really strong showings from like India, China. And getting into the back end of the year, like it's more we've just got capacity constraint to actually grow the revenue beyond that.
George
So that does it in terms of our questions. I would like to turn the call back to Mr. Wu for any closing remarks.
Wayne Yu
Yeah, in general, you know, the microbus starting the high growth, you know, for our business, you know, I'm super happy right now. You know, I don't see any problem for the sales side. And the only, you know, the concentrate on our business is delivery. You know, we need to deliver as much as possible our products. And to find the money to do the expansion, You know, I think I'm seeing that, you know, the multiple year high growth, you know, this is a very positive, you know, going to make us super busy. Thank you all. You know, thank you all for joining this meeting.
Operator
Thank you. And that concludes today's conference. All parties may disconnect. Have a great evening.
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