Thank you for standing by. This is the conference operator. Welcome to the Microvast Third Quarter 2026 Earnings Call. As a reminder, all participants are in listen-only mode, and the conference is being recorded. I would now like to turn the conference over to Microvast Investor Relations. Please go ahead.
Thank you, operator, and thank you everyone for joining our update today. This is Rodney Worthen, Chief Financial Officer at Microvast, and with me on today's call is Mr. Yang Wu, Founder, Chairman, and Chief Executive Officer of Microvast. I will start off with a review of third quarter results before handing the call over to Mr. Wu to provide some operational and business updates. Ahead of this call, Microvast issued its third quarter earnings press release, which can be found on the investor relations section of our website, ir.microvast.com. We've also posted a slide presentation to accompany management's prepared remarks for today's call. As a reminder, please note that this call may include forward-looking statements. These statements are based on current expectations and assumptions and should not be relied upon as representative of views for subsequent dates.
We undertake no obligation to revise, release the results of any revision to these forward-looking statements due to new information or future events. Actual results may differ materially from expectations due to a variety of risks and uncertainties. For more information on material risks and other important factors that could affect our financial results, including substantial doubt and our ability to continue as a going concern, please refer to our filings with the SEC, including our quarterly report on Form 10-Q for the quarter ended September 30, 2026. We may also discuss non-GAAP financial measures during this call. These 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 the most directly comparable GAAP metrics in the tables included at the end of our earnings press release and the slide presentation.
After the conclusion of this call, a webcast replay will be available on the investor relations section of Microvast's website. Now, please join me on slide three, which details our third quarter results for the past several years. Our revenues for the quarter decreased by $77.5 million, or 62.8%, compared to the same period in 2025. The decrease is primarily driven by a 62.2% reduction in sales volume from approximately 502 MWh in Q3 2025 to approximately 190 MWh for the same period in 2026. The decline reflected weaker sales across Europe and APAC as a result of softer end market demand for heavy trucks, port equipment, and heavy mining equipment, which led to reduced orders from several of our longstanding customers across Europe and APAC.
Demand continued to be adversely affected by evolving commercial vehicle regulatory and geopolitical dynamics, including Indian and Korean markets, and demand shift towards lower-cost products in India. The decrease in U.S. sales versus the prior year period is primarily due to our largest customer bringing product into 2025 as a result of uncertainty around tariff outcomes. Our cost of revenues for the quarter decreased by $38.1 million, or 52.7%, compared to the same period in 2025, primarily due to the decrease in sales volume. Our gross profit margin was 5.2% for the quarter compared to 37.6% in 2025. This change was primarily attributable to a $9.3 million write-down for obsolete inventories related to specialized ESS components and other inventories, which negatively impacted our gross margin by 20.4 percentage points.
Excluding the impact of the non-cash charge, decreased gross margins reflected the significant reduction in sales volume and continued pricing pressure in the lithium battery industry. Decrease in revenue also reduced the absorption of fixed manufacturing and operating costs, further compressing gross margin. Our gross margin profile is subject to external pressures, including inflationary trends in raw material pricing, duties, taxes, and tariffs, and elevated logistics and freight expenses resulting from ongoing global supply chain disruptions and geopolitical conflicts. China has imposed a 2% consumption tax on lithium battery products sold in China effective September 1st, 2026, and will increase the tax to 4% effective September 1st, 2027. China also reduced the value-added tax export rebate rate for specified lithium battery products from 9% to 6% effective April 1st, 2026, and will eliminate the export rebate effective January 1st, 2027.
While we continue to implement cost mitigation strategies, these macroeconomic factors combined with a phase-out of regional subsidies for electric vehicle adoption have contributed to a challenging environment for near-term profitability across the battery manufacturing sector. Turn to slide four to view our P&L for the quarter and year-to-date. Let's jump to operating expenses for the quarter, which increased to $69 million compared to $31.6 million in 2025, a 118.8% increase year-over-year. General administrative expenses for the quarter increased by $2.6 million, or 14.7%, compared to the same period in 2025. This increase was primarily due to a provision of $5.1 million for litigation settlement. Under the company's insurance policy, the company's total retention is capped at $10 million, representing its self-insured retention, and the remaining cost and fees, including the remainder of any proposed settlement, are expected to be covered by the insurance.
As of September 30th, 2026, the company had paid $4.9 million towards self-insured retention and accrued the remaining $5.1 million. However, there can be no assurance that the court will approve the proposed settlement or that the settlement will be consummated on the terms described or at all. Additional information is included in our Form 10-Q under Note 16, Commitments and Contingencies. Research and development expenses for the quarter increased by $605,000, or 7.8%, compared to the same period in 2025, and the increase was primarily due to an increase in labor costs as we expanded our investment into new product development. Selling and marketing expenses for the three months decreased by $1.4 million, or 23.9%, compared to the same period in 2025. This decrease is primarily due to lower personnel costs.
Additionally, non-cash impairment charges of long-lived assets were $35.7 million for the quarter, primarily driven by $15 million, $4.4 million, and $16.3 million impairment losses for the operations in China, Germany, and the U.S., respectively. This impairment amount is a result of impairment testing for all production line assets and construction-in-progress assets triggered by the material decline in sales, gross margin, and operating performance during Q3 2026. We reported GAAP net loss of $76.8 million for the quarter. After adjusting for non-cash expenses such as stock-based compensation of $0.8 million, we recorded an adjusted net loss of $76 million compared to an adjusted net profit of $11.9 million last year. Non-GAAP adjusted EBITDA was - $60.8 million in Q3 2026 compared to non-GAAP adjusted EBITDA of $21.9 million in Q3 2025. Our revenues for the nine-month period decreased by $137.4 million, or 41.5%, compared to the same period in 2025.
The decrease was primarily driven by a 37.4% reduction in sales volume from approximately 1,449 MWh for the nine months ended in 2025 to approximately 907 MWh for the same period in 2026. Our gross profit margin was 24.4% for the nine months compared to 36.6% in 2025. This change was primarily attributable to $11.1 million write-down for obsolete inventories related to specialized BMS components and other inventories, which negatively impacted our gross margin by 5.7 percentage points. Excluding the impact of this non-cash charge, the decreased gross margin reflects the significant reduction in sales volume, changes in geographic markets, and continuing price pressure in the lithium battery industry. Substantial decrease in revenue also reduced the absorption of the fixed costs, operating costs, further compressing gross margin.
These declines in revenue and gross margins for the year-to-date period stem from the same factors noted for the quarter, as well as the $2.7 million in tariff refunds issued to U.S. customers, which were recorded as a reduction to our revenue in the current period. Operating expenses increased to $123.6 million for the year-to-date period compared to $84.4 million in 2025, a 46.5% increase year-over-year. General administrative expense for the nine-month period increased by $4.1 million, or 9.6%, compared to the same period in 2025. This increase was primarily due to the provision of the $5.1 million for litigation settlement, $684,000 increase in share-based compensation expenses, and $976,000 increase in insurance fees, partially offset by $1.3 million decrease in labor costs and $2.7 million decrease in the allowance for a credit loss due to improved credit management.
Research and development expenses for the nine-month period increased by $2.3 million, or 9.7%, compared to the same period in 2025. The increase is primarily due to a $2 million increase in labor costs as we expand our investment in new product development. Selling and marketing expenses for the nine-month period decreased by $1.6 million, or 9.7%, compared to the same period in 2025. This decrease was primarily due to a $1.4 million decrease in labor costs. Non-cash impairment charges of the long-lived assets were $35.8 million for the nine-month period, primarily driven by the $15.1 million, $4.4 million, and $16.3 million impairment loss for operations in China, Germany, and the U.S., respectively. We reported a GAAP net loss of $40.6 million for the nine-month period.
For the nine months, non-GAAP adjusted net loss was $96 million compared to non-GAAP adjusted net profit of $47.5 million in the prior year period. Non-GAAP adjusted EBITDA of - $62.7 million compared to non-GAAP adjusted EBITDA of $76.3 million in the prior year. Reconciliations of non-GAAP metrics to the most comparable GAAP metrics are included in the tables at the end of our slide presentation and our earnings press release. Please turn to slide five, where we will review our revenue by region. U.S. sales decreased year-over-year, primarily driven by a large customer bringing product into 2025 due to the uncertainty around tariff outcomes. U.S. revenue was $4.5 million for the quarter, a decrease of 31% compared to $6.6 million in the prior year period.
For the nine-month period, U.S. revenue was $3 million, a decrease of 83% compared to $17.8 million in the prior year period, reflecting in part the $2.7 million reduction related to tariff refunds in Q2. Before that reduction, U.S. revenue for the nine-month period was $5.7 million. European sales were $27.8 million in the quarter, a decrease of 64% compared to 77.9% in the prior year period. The region accounted for 60% of quarterly revenue versus 64% last year. Year-to-date sales were down 30% to $123.5 million compared to $176.8 million in the prior year period. The decline reflected softer end market demand, which led to reduced orders from several of our longstanding customers in the region. APAC sales were $13.5 million in the quarter, a decrease of 65% compared to $38.8 million in the prior year period.
Year-to-date sales decreased 51% to $67.2 million from $136.5 million in the prior year period. In addition to the softer end market demand and reduced orders from longstanding customers previously noted, APAC demand continued to be adversely affected by evolving commercial vehicle regulatory and geopolitical dynamics, including the Indian and Korean markets and demand shift towards lower-cost products in India. Now turning to slide six, we will walk through the cash flow year-to-date. Net cash used in operating activities was $65.4 million for the nine months compared to $59.5 million in cash generated by operating activities in the same period in 2025. This change was primarily due to a $105.1 million reduction in net income after adjusting for non-cash items and a $19.8 million net change in operating assets and liabilities.
The changes in our operating assets and liabilities are primarily driven by the decreases in notes payable, the decreases in accrued expenses and other liabilities, and an increase in inventory balance, partially offset by a decrease in accounts receivable due to the improved credit management. Net cash used in investing activities was $5.6 million for the nine months compared to $15.5 million in the same period in 2025. This cash outflow consisted of $9.2 million for the purchase of an office building in Houston, $7.3 million for the acquisition of machinery and equipment, and other capital expenditures related to the expansion of our Huzhou Phase 3.2 manufacturing facility, partially offset by $10.8 million in proceeds for the sale of our facility in Lake Mary, Florida, which is classified as held for sale before the disposal.
Net cash generated by financing activities was $23.3 million for the nine months, an increase of $32.8 million compared to $9.5 million used in the same period in 2025. The increase was primarily due to $25.7 million increase in proceeds from bank borrowings, $10.9 million decrease in deferred payment related to the purchase of property, plant, and equipment, as the majority of them were settled during the first quarter of 2026, partially offset by $6.1 million increase in repayments of bank borrowings. After accounting for foreign exchange adjustment of $3 million, cash equivalents, and restricted cash decreased by $44.8 million, and we ended the quarter with cash equivalents, and restricted cash of $124.4 million. Now I'll hand it over to Mr. Wu to go over some operational and business updates.
Thank you. As our financial results detail, the third quarter presented a highly challenging operating environment for Microvast. We navigated softer commercial vehicle demand across our key markets in Europe and Asia-Pacific region, which was compounded by ongoing industry pricing pressures. While those extended macroeconomic headwinds led to a material decline in our top-line revenue and operating performance, our team is intensively focused on the variables within our control: cost containment, protecting our liquidity, addressing our significant near-term debt maturities, and advancing our strategic production milestones. Regarding our manufacturing roadmap, installation and commissioning of Phase 3.2 production equipment at our Huzhou, China facility have been completed. Production ramp-up depends on the customer demand, production yields, production qualification, operating efficiency, and working capital availability. Unless production volumes increase significantly, this Phase 3.2 line will operate below its designed capacity.
In the U.S., the pack assembly line at our Clarksville facility is substantially completed. Resumption of full-scale construction at the facility remain contingent upon securing additional financing and strategic partnerships. Next, I'd like to go over some of our latest updates in research and development. Please join me on slide eight. Despite the financial challenges, we continue to make measured progress in research and development. These technologies remain under development. However, the laboratory results do not establish commercial readiness. In our solid-state program, we have advanced our liquid-free architecture. Under laboratory conditions, our 70-layer bipolar prototype successfully delivered approximately 72 v and achieved a specific energy of 366 watt-hour per kilogram. In extended testing, a long-cycle development cell retained over 79.5% of its capacity after more than 1,300 cycles at 0.33C. Our solid-state battery are currently at the early-stage prototype stage.
The results I have described are preliminary research and development data from separate prototypes obtained under limited laboratory or test conditions. They are not commercial qualification results and remain subject to further validation, repeat testing, scale-up, customer qualification, manufacturing readiness, and capital availability. Finally, on slide nine, we are also advancing our silicon-sulfur chemistry. Our early laboratory prototypes pair a sulfur-based cathode with a pre-lithiated silicon-based anode. A five-layer bipolar prototype study demonstrated that the expansion of the cathode is partially offset by the contraction of the anode during discharge. We are evaluating this internal dimensional compensation as a potential pathway to monolithic integration in higher-voltage solid-state assemblies. Our silicon-sulfur chemistry is currently at an early laboratory prototype stage, and those results are similarly preliminary and subjected to the same further validation, testing, scale-up, qualification, and manufacturing readiness, and capital requirements. Please turn to slide 10.
In light of the uncertainty regarding our liquidity position, our ongoing discussion with our lender regarding the refinancing, extension, or restructuring of our near-term debt obligations, and the softer end-market demand, our near-term priorities are centered on controlling cost, preserving liquidity, addressing our significant near-term debt maturity, and stabilizing our operations. We are implementing operating cost reduction initiatives across all areas of the business, reducing and deferring certain discretionary capital expenditures, and implementing targeted reduction in workforce in certain of our operations. Our cost reduction program has not been fully implemented, and the cash costs associated with this program have strained and may continue to strain our near-term liquidity.
In conjunction with our efforts to stabilize our business, we are exploring all potential options to address our liquidity position, including potential asset sales, and we are engaged in negotiations with our lenders to refinance, extend, or restructure our near-term debt obligations. No assurance can be made that those negotiations will be successful. We continue to explore potential near-term opportunities in the commercial vehicle market. Our team is actively navigating this difficult global macroeconomic environment, and we remain focused on executing our revised business plan to preserve our liquidity. There can be no assurance that those efforts will be successful, and as disclosed in our Form 10-Q, substantial doubt about our ability to continue as a going concern has not been alleviated. Thank you for your continued support. We look forward to sharing further updates in the months ahead.
This is the conference operator. This concludes the webcast. Thank you for joining Microvast's third quarter 2026 earnings call. You may now disconnect.