Microvast Holdings, Inc. (MVST)

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis provides information that our management believes is relevant to an assessment and understanding of our consolidated results of operations and financial condition. The discussion should be read together with the historical consolidated financial statements and related notes that are included elsewhere in this Annual Report. Discussion of the earliest of the three years covered by the Consolidated Financial Statements presented in this report has been omitted as that disclosure is included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2024 in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations within that report. This discussion may contain forward-looking statements based upon current expectations that involve risks and uncertainties.

The Business

Microvast Holdings, Inc. is an advanced battery technology company, headquartered in Stafford, Texas, and publicly traded on the NASDAQ under the ticker symbol MVST. We specialize in the design, development, and manufacturing of battery components and systems primarily for electric commercial vehicles and utility-scale energy storage systems ("ESS").

Founded in 2006, Microvast was built on a guiding principle that remains central to our mission today: to innovate lithium-ion battery designs without relying on past technologies. We call this true innovation. We started without preconceived notions of lithium-ion battery creation, unlike many companies that repurposed legacy technologies for new markets like electric vehicles – a process we consider product development rather than true innovation. To understand this difference is to understand what we have set out to achieve.

Our mission is to accelerate the global transition to electrification by delivering innovative battery solutions that support the adoption of electric vehicles and renewable energy. A key strategic focus is to be in a position to lead U.S. domestic battery production, reducing reliance on overseas suppliers, and strengthening national energy independence. We believe continuous investment in our technology and operations will deliver long-term targeted revenue and income growth.

Through a vertically integrated approach, we have developed proprietary technologies spanning the entire battery system—from the core materials of a battery cell (cathode, anode, electrolyte, separator) to thermal management systems and advanced software controls. Our expertise has driven advancements in ultra-fast charging, high energy density, long lifespan, and safety—critical factors for commercial transportation and ESS applications.

We are expanding our production of battery systems and components, with an increased emphasis on ESS solutions to support the broader shift to electrification. Our goal is to become a global leader in ESS, bridging the gap between EVs and renewable energy.

One of our recent innovations is our high-energy nickel manganese cobalt ("NMC") 53.5 ampere-hour battery cell (the “53.5Ah”). We believe its advanced performance characteristics make it an optimal solution for both commercial vehicle and ESS applications. To bring this product to market, we have made substantial investments in capacity expansion in Huzhou, China, where we operate fully automated production equipment that delivers significant operational efficiencies.

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In previous years, we made significant investments in our capacity expansion in Clarksville, Tennessee and by the fourth quarter of 2023 had started to install certain sections of the production line. However, progress on certain third party construction workstreams as well as taking delivery and possession of further equipment started to be impacted toward the end of the fourth quarter of 2023 due to the required funding to complete the project not being secured. Ultimately, in the second quarter of 2024, we paused construction efforts on the Clarksville development due to insufficient funding. We made a strategic decision to pivot from the originally planned production of NMC production in Clarksville, Tennessee to the 565Ah lithium iron phosphate ("LFP") battery. We also consolidated our ESS operations previously in Colorado to Clarksville, Tennessee in order to enhance operational efficiencies and speed of deliveries for our U.S. business.

In August 2024, we introduced the ME6 ESS, featuring the LFP battery. The shift toward LFP technology for the U.S. ESS market is a strategic decision. The ME6 system offers a cycle life exceeding 10,000 cycles, a lifespan of up to 30 years, compact storage capabilities (6 megawatt hours ("MWh") in a 21-foot container), and enhanced reliability through IP55, C4, and nitrogen protection features. The adoption of LFP batteries provides lower costs, greater safety, and environmental benefits compared to NMC technology, further supporting our sustainability goals. Although construction progress has been negatively impacted by funding constraints, our goal is that our Clarksville, Tennessee facility will be our major production facility for LFP cells pending financing and facility completion.

In January 2025, we announced what we believe is a major breakthrough in solid-state battery technology. This innovation represents a paradigm shift, delivering higher energy density for extended range and improved efficiency, enhanced safety by eliminating risks associated with thermal runaway, and faster charging capabilities with an extended cycle life. We plan to make substantial investments in research and development ("R&D") to accelerate commercialization, with applications spanning EVs, grid storage, and high-performance energy systems.

For the year ended December 31, 2024, our revenue increased by $73.2 million, reaching $379.8 million, a 24% year-over-year increase. Additionally, our order backlog stood at $401.3 million, with the majority of these orders expected to be fulfilled in 2025 and 2026. As we continue to expand production capacity and advance next-generation battery technologies, we remain committed to driving electrification, fostering innovation, and supporting long-term sustainable growth.

We remain committed to driving battery innovation, scaling global production, and delivering high-performance sustainable energy solutions that power the future of mobility and energy storage.

Segment Reporting and Financial Performance

The Company evaluates segment performance based on revenue growth, operating income, and geographic breakdowns. In accordance with ASU 2023-07, we have expanded our segment disclosures to provide enhanced insights into key financial metrics.

Segment Revenue and Performance Overview

Revenue Growth: The Company experienced a 24% increase in revenue for the most recent fiscal year, driven by strong regional market expansion and improved sales execution.

Geographical Breakdown: Revenue contributions from North America, Europe, and Asia reflect our diversified business strategy.

Operating Performance: Key operational improvements in cost management and product optimization led to enhanced segment profitability.

Completion of the Business Combination

On July 23, 2021, Microvast Holdings, Inc. (formerly known as Tuscan Holdings Corp.) consummated the previously announced acquisition of Microvast, Inc., a Delaware corporation, pursuant to the Agreement and Plan of Merger dated February 1, 2021, between Tuscan, Microvast and TSCN Merger Sub Inc., a Delaware corporation, pursuant to which TSCN Merger Sub Inc. merged with and into Microvast, with Microvast surviving the merger.

Going Concern

In accordance with Accounting Standards Codification (“ASC”) Topic 205-40, Presentation of Financial Statements – Going Concern, the Company evaluates whether there are conditions or events, considered in the aggregate,

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that raise substantial doubt about its ability to continue as a going concern within one year after the date the consolidated financial statements are issued. This evaluation includes considerations related to liquidity and capital resources.

In prior periods, the Company disclosed that substantial doubt existed about its ability to continue as a going concern, due to uncertainties related to liquidity, capital requirements, and operating losses.

However, during the third and fourth quarters of the year ended December 31, 2024, the Company achieved positive operating income, reflecting meaningful progress toward sustainable profitability. This improvement was driven by increased customer demand, improved gross margins, and reduced operating expenses, which have positively impacted the Company’s liquidity position.

Based on this recent operating performance, current cash balances, available funding sources, and management’s expectations regarding future operations and capital needs, the Company has concluded that it is probably that their plans will alleviate substantial doubt about its ability to continue as a going concern for at least twelve months from the issuance date of these consolidated financial statements. For additional detail, refer to Note 2 to the audited consolidated financial statements included in this Annual Report.

Subsequent Events

See Note 29 to the audited consolidated financial statements of this Annual Report.

Smaller Reporting Company

We are a “smaller reporting company” as defined in Rule 10(f)(1) of Regulation S-K. Smaller reporting companies may take advantage of certain reduced disclosure obligations, including, among other things, providing only two years of audited financial statements. We will remain a smaller reporting company until the last day of the fiscal year in which (1) the market value of our shares held by non-affiliates equals or exceeds $250 million as of the prior June 30th, or (2) our annual revenues equaled or exceeded $100 million during such completed fiscal year and the market value of our shares held by non-affiliates equals or exceeds $700 million as of the prior June 30th.

Key Factors Affecting Our Performance

Our future success depends on several critical factors, including those outlined below. While these represent opportunities for growth, they also pose challenges and risks that we must effectively manage to sustain our business momentum and improve financial performance.

Technology and Product Innovation

Our financial performance is driven by development and sales of new products with innovative technology. Our ability to develop innovative technology has been and will continue to be dependent on our dedicated research team. As part of our efforts to develop innovative technology, in October 2021, we expanded our R&D footprint in Orlando by purchasing a 75,000 square foot facility dedicated to R&D. We plan to continue expanding our R&D presence in the U.S. We also plan to continue leveraging our knowledge base in our overseas locations, including China and to continue expanding our R&D efforts on a global basis. We expect our results of operations will continue to be impacted by our ability to develop new products with improved performance and reduced ownership cost, as well as the cost of our R&D efforts.

Market Demand

Our revenue and profitability depend substantially on the demand for battery systems and battery components, which is driven by the growth of the commercial and passenger electric vehicle and energy storage markets. Many factors contribute to the development of the electric vehicle and battery energy storage sector, including product innovation, general economic and political conditions, environmental concerns, energy demand, government support and economic incentives(e.g., the IRA in the U.S. and the E.U. Green Deal, E.U. Fit for 55). While governmental economic incentives and mandates can drive market demand for the markets in which we operate and, as a result, battery systems and components, governmental economic incentives can always be gradually reduced or eliminated. Any reduction or

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elimination of governmental economic incentives may result in reduced demand for our products and adversely affect our financial performance.

Manufacturing Capacity

Our growth depends on being able to meet anticipated demand for our products. In order to do this, we will need to increase our manufacturing capacity. As of December 31, 2024, we had a backlog of approximately $401.3 million for our battery systems. So far we have used $475.4 million of the proceeds from the Business Combination to expand our manufacturing facilities in order to increase our manufacturing output, enabling us to address our backlog and to capture growing market opportunities.

In the third quarter of 2023, we successfully completed the 2 GWh cell, module and tray capacity expansion for our 53.5Ah cell technology in Huzhou, China. The demand for our 53.5Ah cell technology from our commercial vehicle customer base will be primarily met from this facility.

Without access to financing, we are unable to progress the Clarksville expansion project on its intended timetable, and further progress is still contingent on having full access to funding to complete the remaining project work.

Future capacity expansions, will require significant capital expenditures and will require a corresponding expansion of our supporting infrastructure, further development of our sales and marketing team, an expansion of our customer base and strengthened quality control. This capacity expansion will be carried out in a measured manner based on our ongoing assessment of medium- and long-term demand for our solutions.

Sales Geographic Mix

After initially being focused on the Asia & Pacific regions, we have expanded and continue to expand our presence and product promotion to Europe and the U.S. to capitalize on the rapidly growing electric vehicle and battery energy storage markets in those geographies. As we continue to expand our geographic focus to Europe and the U.S., we believe sales of our products in Europe and the U.S. will have the potential to generate higher gross margins because average sales prices for customers in the U.S. and Europe are typically significantly higher than the average sales prices in China. It has been our experience that buyers in Europe and the U.S. are more motivated by the technologies and quality of our products than are buyers in China, making them less sensitive to the price of our products than are similarly situated buyers in China where we are also faced with intense competition from local Chinese battery manufacturers. Therefore, the geographic sources of our revenue will have an impact on our revenue and gross margins.

Manufacturing Costs

Our profitability may also be affected by our ability to effectively manage our manufacturing costs. Our manufacturing costs are affected by fluctuations in the price of raw materials. If raw material prices increase, we will have to offset these higher costs either through price increases to our customers or through productivity improvements. Our ability to control our raw materials costs is also dependent on our ability to negotiate with our suppliers for a better price and our ability to source raw materials from reliable suppliers in a cost-efficient manner. In addition, we expect that an increase in our sales volume will enable us to lower our manufacturing costs through economies of scale.

Regulatory Landscape

The battery industry is subject to stringent and evolving environmental regulations, particularly concerning hazardous waste management, pollution control, and sustainability requirements. Over time, these regulations have become increasingly strict, impacting both product costs and gross margins. Compliance with these standards requires continuous investment in manufacturing processes, material sourcing, and waste disposal practices to ensure adherence to environmental mandates across multiple jurisdictions.

Additionally, government policies and economic incentives play a critical role in shaping demand for electric vehicles (EVs) and energy storage systems (ESS). Incentives such as EV purchase subsidies, tax credits for battery manufacturers, and renewable energy project grants have historically supported market growth. Similarly, carbon emission penalties and fleet-wide regulatory requirements for automakers further drive the adoption of zero-emission transportation and clean energy solutions. These policies expand our total addressable market, creating opportunities for increased sales and broader adoption of our battery technologies. However, changes in these incentives—such as reductions or eliminations of subsidies—could negatively affect demand for our products.

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As a global company with operations and sales in China, the Asia-Pacific region, Europe, and the U.S., we are also exposed to trade policies, tariffs, and regulatory shifts that could impact our ability to meet projected sales and maintain profit margins. Any significant changes in international trade agreements, supply chain restrictions, or geopolitical tensions may influence production costs, material sourcing, and cross-border sales strategies. Navigating these regulatory complexities is essential to sustaining our competitive position and long-term growth trajectory.

Basis of Presentation

We currently conduct our business through one operating segment. Our historical results are reported in accordance with U.S. GAAP and in U.S. dollars.

Components of Results of Operations

This section of this Form 10-K generally discusses 2023 and 2024 items and year-to-year comparisons between 2023 and 2024. Discussions of 2022 items and year-to-year comparisons between 2022 and 2023 are not included in this Form 10-K, and can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Form 10-K filed on April 1, 2024.

Revenue

We derive revenue from the sales of our electric battery products, including LpTO, LpCO, MpCO, HpCO and HnCo battery power systems. While our sales have historically been concentrated in China and the broader Asia-Pacific region, we are actively expanding our international presence to capture growing demand in key global markets.

The following table provides a breakdown of our revenue by major geographic regions, based on the locations of our customers, for the periods indicated:

We have historically derived a portion of our revenue in a given reporting period from a limited number of key customers, which have varied from period to period. For the year ended December 31, 2024, one customer accounted for 39% of our net revenues. In 2023, two customers accounted for 18% and 11% of our net revenues.

Cost of Revenues and Gross Profit

Cost of revenues includes direct and indirect materials, manufacturing overhead (including depreciation, freight and logistics), warranty reserves and expenses, provision for obsolete inventories, and labor costs and related personnel expenses, including stock-based compensation and other related expenses that are directly attributable to the manufacturing of products.

Gross profit is equal to revenue less cost of revenues. Gross profit margin is equal to gross profit divided by revenue.

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Operating Expenses

Our operating expenses consist of selling and marketing, general and administrative (G&A), and research and development (R&D) expenses.

Selling and marketing expenses. Selling and marketing expenses include personnel-related costs for our sales and marketing teams, including salaries, stock-based compensation, and commission-based incentives. These expenses also cover advertising, promotional activities, and customer engagement efforts to drive product awareness and sales growth. As we continue to expand, we plan to hire additional sales personnel, enhance marketing programs, and strengthen customer relationships. Consequently, selling and marketing expenses are expected to increase in absolute dollar terms over the long term.

General and administrative expenses. General and administrative expenses primarily comprise personnel-related costs for our executive, legal, finance, human resources, and IT teams, along with professional service fees, depreciation, amortization, and insurance costs. As we scale operations, we anticipate additional expenditures for personnel hiring, infrastructure development, and compliance-related activities. These investments are necessary to support our anticipated growth and ensure operational efficiency.

R&D expenses. primarily include salaries and stock-based compensation for our engineers and scientists, as well as raw material costs for experimental development, utility expenses, and depreciation costs related to R&D activities. As we continue to invest in new product development, advanced battery technologies, and enhanced functionality, we expect R&D expenditures to increase in absolute dollar terms. These investments are critical to maintaining technological leadership and delivering next-generation battery solutions to the market.

Subsidy Income

Government subsidies represent government grants received from local government authorities. The amounts of and conditions attached to each subsidy were determined at the sole discretion of the relevant governmental authorities. Our subsidy income is non-recurring in nature.

Other Income and Expenses

Other income and expenses consist primarily of the interest expense associated with our debt financing arrangements, interest income earned on our cash balances, gains and losses from foreign exchange conversion, and gains and losses on disposal of assets.

Income Tax Expense

We are subject to income taxes in the U.S. and the foreign jurisdictions in which we do business, namely China, Germany and the U.K. These foreign jurisdictions have statutory tax rates different from those in the U.S. Accordingly, our effective tax rates will vary depending on the relative proportion of foreign to U.S. income, the absorption of foreign tax credits, changes in the valuation of our deferred tax assets and liabilities and changes in tax laws. We regularly assess the likelihood of adverse outcomes resulting from the examination of our tax returns by the U.S. Internal Revenue Service and other tax authorities to determine the adequacy of our income tax reserves and expense. Should actual events or results differ from our current expectations, charges or credits to our income tax expense may become necessary. Any such adjustments could have a significant impact on our results of operations.

Income tax in China is generally calculated at 25% of the estimated assessable profit of our subsidiaries in China, except that two of our subsidiaries in China are qualified as “High and New Tech Enterprises” and thus enjoy a preferential income tax rate of 15%. The federal corporate income tax rate of 21% is applied for our U.S. entities. Our income tax in the U.K. is calculated at an average tax rate of 19% of the estimated assessable profit of our subsidiary in the U.K. The German enterprise income tax, which is a combination of corporate income tax and trade tax, is calculated at 29.1% of the estimated assessable profit of our subsidiary in Germany.

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Results of Operations

This section of this Form 10-K generally discusses 2024 and 2023 items and year-to-year comparisons between 2024 and 2023.

Comparison of the Year Ended December 31, 2024 to the Year Ended December 31, 2023

The following table sets forth our historical operating results for the periods indicated:

Revenue

Our revenue increased from $306.6 million in 2023 to $379.8 million in 2024, reflecting a 23.9% year-over-year (YoY) growth. This expansion was primarily driven by a 41.6% increase in sales volume, rising from 1,139.6 MWh in 2023 to 1,613.6 MWh in 2024.

The surge in volume was fueled by strong demand for our battery cell products from both new and existing customers across the Asia-Pacific and European markets. As we broadened our geographic footprint and strengthened customer relationships, our ability to scale production and meet rising demand contributed to this sustained growth.

Cost of Revenue and Gross Profit

Our cost of revenues for the year ended December 31, 2024, increased by 4.4% compared to 2023, primarily due to higher sales volumes. However, this increase was significantly lower than the 23.9% year-over-year revenue growth, reflecting improved operational efficiency, cost controls, and economies of scale.

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As a result, our gross profit margin expanded from 18.7% in 2023 to 31.5% in 2024. This improvement was driven by higher production utilization, which enhanced the absorption of fixed costs. A more favorable product mix, with a growing share of higher-margin battery solutions, contributed to increased profitability. Additionally, lower raw material prices helped reduce input costs. These factors collectively highlight our ability to scale operations while improving profitability, positioning us for continued margin expansion and long-term financial growth.

Selling and Marketing

Selling and marketing expenses for the year ended December 31, 2024, decreased by $1.0 million (4.4%) compared to 2023. This reduction was primarily driven by a $2.1 million decrease in share-based compensation expenses and reductions of the U.S. headcount in Q2 2024, which was partially offset by continued investments in customer engagement and market expansion initiatives.

General and Administrative

General and administrative expenses for the year ended December 31, 2024, decreased by $15.3 million (15.8%) compared to 2023. This decline was primarily driven by a $24.4 million reduction in share-based compensation expenses, partially offset by higher legal and insurance costs.

Research and Development

Research and development expenses for the year ended December 31, 2024, decreased by $3.9 million (8.8%) compared to 2023. This reduction was primarily driven by a $5.0 million decrease in share-based compensation expenses, partially offset by a $1.8 million increase in personnel-related costs as we expanded our research team to support ongoing product development and innovation initiatives.

Impairment loss from long-lived assets

During the first half year of 2024, the Company decided to pause the construction of the battery plant in Clarksville, Tennessee until additional funding for the remaining capital expenditure is secured. The Company reassessed the recoverability of the long-lived assets in U.S. For the year ended December 31, 2024, the Company recognized $93.2 million impairment losses which is mainly from the impairment of long-lived assets in U.S.

Subsidy Income

Subsidy income increased from $2.0 million for the year ended December 31, 2023 to $2.7 million in the same period in 2024. The amounts are the one-time awards granted by local governments in 2023 and 2024.

Gain on debt restructuring

During the year ended December 31, 2024, the company recorded a gain of $9.4 million on the payable concession.

Changes in fair value of warrant liability and convertible loan

For the year ended December 31, 2024, we recorded a non-cash loss of $80.0 million, primarily related to the change in the fair value of our convertible loan. This includes a $79.7 million fair value adjustment on the convertible loan issued to a shareholder. The loss was primarily driven by a significant increase in our share price during the period, which raised the fair value of the loan's conversion feature.

These instruments are measured at fair value on a recurring basis, and their valuation requires the use of significant estimates and assumptions. The fair value changes do not impact our cash position or operating performance but have a material effect on our reported net income. As of December 31, 2024 the outstanding balance was $104.6 million.

Liquidity and Capital Resources

Since inception, we have financed our operations primarily through capital contributions from equity holders, the issuance of convertible notes, and bank borrowings. As of December 31, 2024, our principal sources of liquidity included cash and cash equivalents and restricted cash totaling $109.6 million.

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Our consolidated net cash position of $109.6 million as of December 31, 2024, comprised $73.0 million in cash and cash equivalents, with $37.0 million held by our China subsidiary and $9.2 million held by our German and UK subsidiaries. These funds are not readily available for domestic operations unless repatriated. If we need to transfer any of these funds to the U.S. in the form of a dividend, we would be required to accrue and pay withholding taxes. However, we do not intend to pay cash dividends on our common stock in the foreseeable future. Instead, we plan to retain available funds and future earnings to support our ongoing operations and expansion efforts in China, the E.U., and the U.S.

In accordance with Accounting Standards Update ("ASU") No. 2014-15, “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (Subtopic 205-40),” management has evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about our ability to continue as a going concern within one year after the date of the consolidated financial statements are issued and has determined that our ability to continue as a going concern is dependent on our ability to generate cash from future operations and additional capital. In light of operating requirements under our current business plan, we are projecting that the existing cash and assets available for sale and equity securities will not be sufficient to fund our operations through the next twelve months. These conditions and events raise substantial doubt about the our ability to continue as a going concern.

To alleviate the conditions and events that raise substantial doubt about the Company’s ability to continue as a going concern, management developed primary plans as described below.

•    Forecasted cash inflow from operations - For the year ended December 31, 2024, we generated cash flow of $2.8 million from operating activities. In the forecasted period, we have order backlog of $401.3 million, with the majority of these orders expected to be fulfilled in 2025 and 2026. Additionally, we expected to generate higher gross margins because we will generate more revenue from Europe and the U.S with higher sales prices. We don't expect significant fluctuations in the gross margin considering the selling price secured by the contract backlogs and the market conditions of major raw materials. Thus, we believe that the operating cash flow in the forecasted period will continue to grow.

•    Refinancing of short-term bank borrowings - Historically, we have rolled over or obtained replacement borrowings from existing creditors for its short-term bank loans upon the maturity date of the loans if needed. For $37.1 million short-term bank borrowings outstanding as of December 31, 2024 which we have successful refinancing experience, if needed, we will be able to refinance them as they become due for the next twelve months.    In early 2025, the Company successfully refinanced loans of $12.3 million that matured.

Based on the above, we concluded that it is probable that these plans will alleviate substantial doubt about the Group’s ability to continue as a going concern and that adequate sources of liquidity will exist to fund the working capital and capital expenditures requirements and to meet our short term debt obligations, and other liabilities and commitments as they become due.

To enhance liquidity, we secured a $101.5 million bank loan during the year ended December 31, 2024 (see Note 12 – Bank Borrowings). Additionally, workforce reductions in the U.S. during the second and third quarters of 2024 have resulted in cost savings and improved cash flow.

Further strategies to strengthen liquidity include optimizing operations, asset sales, and evaluating funding options. The Company achieved income from operation in the second half of 2024, and continued execution of its business strategy is expected to support positive cash flow generation over the next twelve months. Additionally, the Group is actively pursuing the sale of non-core U.S. real estate assets, which is expected to enhance liquidity without affecting core operations.

Although no additional binding financing agreements have been entered into, the Group remains engaged in discussions with third parties to explore further capital-raising opportunities. Future capital requirements may change based on business developments, market conditions, and liquidity needs. The company continues to evaluate potential options, including equity offerings and debt financing, to ensure financial flexibility and long-term growth.

Financings

As of December 31, 2024, we had bank borrowings of $111.7 million, the terms of which range from one month to two years. The interest rates of our bank borrowings ranged from 3.25% to 4.85% per annum. As of December 31, 2024, we had convertible bonds of $43.2 million, with interest rates ranging from 3% to 4%. The convertible bonds are due in 2027. As of December 31, 2024, we also had the convertible loan with shareholder of $104.6 million outstanding at an initial interest rate equal to Term SOFR for the applicable interest period, plus an initial applicable margin of 9.75% per

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annum, 3.75% of which shall be paid in kind and added to the outstanding principal under the convertible loan with shareholder, with the remaining interest to be paid in cash. See Note 26 for details. As of December 31, 2024, we were in compliance with all material terms and covenants of our loan agreements, credit agreements and bonds.

On July 23, 2021, we received $708.4 million from the completion of the Business Combination, $705.1 million net of transaction costs paid by Microvast, Inc. We have used $475.4 million of the net proceeds from the Business Combination to expand our manufacturing facilities and for the purchase of property and equipment associated with our existing manufacturing and R&D facilities. In addition, $185.6 million of the net proceeds were used for working capital as of December 31, 2024.

Although no additional binding financing agreements have been entered into, the Group remains engaged in discussions with third parties to explore further capital-raising opportunities. Future capital requirements may change based on business developments, market conditions, and liquidity needs. The company continues to evaluate potential options, including equity offerings and debt financing, to ensure financial flexibility and long-term growth.

The exercise price for our outstanding warrants is $11.50 per share of common stock, and the trading price of our common stock was $1.27 as of March 24, 2025. There is no guarantee that the warrants will be exercised prior to their expiration, however, we do not expect this to impact our liquidity.

Capital expenditures and other contractual obligations

Our capital expenditures amounted to $49.9 million and $186.8 million for the years ended December 31, 2024 and 2023, respectively. Our capital expenditures in 2024 and 2023 related primarily to the construction of manufacturing facilities under our Clarksville expansion and Huzhou, China.

In 2021, we started our capacity expansion plans in Huzhou, China, Berlin, Germany and Clarksville, Tennessee. The project in Germany was completed in 2021. The China Phase 3.1 capacity expansion was successfully completed in the third quarter of 2023.

Because of delays in securing additional financing, in the fourth quarter of 2023 we began experiencing slow progress in continuing construction of our Clarksville expansion, slowing down certain construction work streams due to the need for additional financing. This facility was initially intended to produce 53.5Ah cells for our ESS solutions; however, we believe that LFP cells are better suited for our ESS solutions and intend to utilize the Tennessee facility to produce LFP cells instead of 53.5Ah cells. Additionally, our ESS products that were previously developed and assembled in Colorado are now planned to be assembled at our Tennessee facility once the facility is completed. The proceeds from the Business Combination alone will not be sufficient to complete the Clarksville expansion and meet our general working capital needs and due to foreign restrictions and adverse tax consequences as well as the working capital needs of Microvast Power Systems Co. Ltd., we are unable to repatriate cash from China to pay our accounts payable in the U.S. and fund the continued expansion of our U.S. operations. We are seeking alternate sources of capital. Until financing is in place, this will limit our growth opportunities, especially in the U.S. market where our customers desire products that meet their domestic content requirements. We are seeking to secure financing to complete the Tennessee facility.

Our future capital requirements will depend on many factors, including, but not limited to funding planned production capacity expansions and for general working capital. In addition, we may in the future enter into arrangements to acquire or invest in complementary businesses or technologies. We may need to seek additional equity or debt financing in order to meet these future capital requirements. If we are unable to raise additional capital when desired, or on terms that are acceptable to us, our business, financial condition and results of operations could be adversely affected. There are no material off-balance sheet arrangements other than those described below.

Lease Commitments

We lease certain facilities and equipment under non-cancellable lease agreements that expire at various dates through 2036. For additional information, see Note 17 – Leases, in the notes to the audited condensed consolidated financial statements in Part II, Item 8 of this Report on Form 10-K.

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Purchase Commitments

We regularly enter into non-cancelable contractual obligations primarily related to purchases of inventory. As of December 31, 2024, such purchase commitments, which do not qualify for recognition on our consolidated balance sheets, amount to $48.2 million, most of which is short-term.

Cash Flows

The following table provides a summary of our cash flow data for the years indicated:

Cash Flows from Operating Activities

During the year ended December 31, 2024, our operating activities generated $2.8 million in cash, compared to a cash outflow of $75.3 million in 2023 . The positive operating cash flow in 2024 was primarily driven by non-cash adjustments and changes in working capital, offsetting the net loss for the year.

In 2024, our net loss totaled $195.5 million, offset by $251.0 million in non-cash charges, including $30.1 million in depreciation of property, plant, and equipment, $30.8 million in non-cash share-based compensation, $93.2 million in impairment losses from property, plant and equipment, and $80.0 million in fair value changes related to warrants and convertible loans. However, operating assets and liabilities resulted in a $52.7 million cash outflow, mainly due to a $0.5 million increase in inventories, a $13.2 million decrease in accrued liabilities and prepaid expenses, and a $54.4 million reduction in accounts payable and notes payable, partially offset by a $15.3 million net decrease in accounts receivable and notes receivable and a $0.1 million increase in other operating assets and liabilities.

In 2023, operating activities used $75.3 million in cash, driven by a net loss of $106.4 million and $109.6 million in non-cash adjustments, including $22.1 million in depreciation and $65.0 million in share-based compensation. A $78.5 million decrease in cash flows from operating assets and liabilities contributed to the cash outflow, primarily due to a $47.1 million increase in accounts receivable and notes receivable, a $74.4 million increase in inventories, and a $7.7 million decrease in accrued liabilities and prepaid expenses, partially offset by a $65.1 million increase in accounts payable and notes payable.

Cash Flows from Investing Activities

During the year ended December 31, 2024, cash used in investing activities totaled $12.2 million, a significant reduction compared to previous years. This outflow was primarily driven by $27.7 million in capital expenditures related to the expansion of our manufacturing facilities and the acquisition of property and equipment for existing manufacturing and R&D operations. These outflows were partially offset by $5.5 million in proceeds from the maturity of short-term investments and $10.0 million from the disposal of property, plant, and equipment.

During the year ended December 31, 2023, cash used in investing activities totaled $165.6 million, primarily due to $186.8 million in capital expenditures for manufacturing expansion and R&D infrastructure, along with $5.9 million in short-term investment purchases. These were partially offset by $25.5 million in proceeds from the maturity of short-term investments and $1.6 million from the disposal of property, plant, and equipment.

The significant reduction in investing cash outflows in 2024 reflects a measured approach to capital expenditures, as we continue to align investment decisions with available funding and strategic growth priorities.

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Cash Flows from Financing Activities

During the year ended December 31, 2024, cash generated by financing activities totaled $37.6 million. This inflow was primarily driven by $101.5 million in proceeds from bank borrowings and $25.0 million in proceeds from a convertible loan. These were partially offset by $66.2 million in repayments on bank borrowings, $0.5 million in debt costs related to the convertible loan, and $22.2 million in deferred payments for property, plant, and equipment purchases.

During the year ended December 31, 2023, cash generated by financing activities totaled $33.0 million. This was primarily attributable to $47.8 million in proceeds from bank borrowings, partially offset by $14.1 million in repayments on bank borrowings and a $0.7 million partial repayment on outstanding bonds.

The increase in financing activities in 2024 reflects our efforts to secure additional funding through bank borrowings and convertible loans, supporting ongoing operational and strategic initiatives.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses, and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates.

We believe the following critical accounting policies involve a higher degree of judgment and complexity than our other accounting policies. Therefore, these are the policies we believe are the most critical to understanding and evaluating our consolidated financial condition and results of operations.

Impairment of Long-Lived Assets

In accordance with ASC 360, Property, Plant and Equipment ("ASC 360"), we review long-lived assets such as property, plant and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future net undiscounted cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets, and an impairment loss is recorded as a component of operating expenses. Fair value is estimated based on various valuation techniques. For assets held for sales, the amount of potential impairment may be based upon appraisal of the asset, estimated market value of similar assets or estimated cash flow from the disposition of the asset. The evaluation of asset impairment requires us to make assumptions about future cash flows over the life of the asset being evaluated. These assumptions require significant judgment and actual results may differ from assumed and estimated amounts.

Convertible loan with shareholder

We elected the fair value option to account for the convertible loan with shareholder and records changes in fair value in the consolidated statements of operations, with the exception of changes in fair value due to instrument-specific credit risk which, if present, will be recorded as a component of other comprehensive income. Interest expense related to the convertible loan is included in the changes in fair value. The fair value of the convertible loan with shareholder was determined by using a discounted cash flow model for the bond component and a Black-Scholes-Merton model for the conversion option, which is considered a Level 3 fair value measurement.

Inventories

Inventories are stated at the lower of cost or net realizable value. Cost is determined using the weighted average method. Inventory levels are analyzed periodically and written down to their net realizable value if they have become obsolete, have a cost basis in excess of expected net realizable value or are in excess of expected demand. We analyze current and future product demand relative to the remaining product life to identify potential excess inventories. These forecasts of future demand are based upon historical trends and analysis as adjusted for overall market conditions. Inventory write-downs are measured as the difference between the cost of the inventory and its net realizable value, and charged to inventory reserves, which is a component of cost of revenue. At the point of the loss recognition, a new, lower cost basis for those inventories is established, and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis. We recorded inventory impairment losses of $3.3 million and

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$3.6 million during the years ended December 31, 2024 and 2023, respectively. We monitor the inventory impairments periodically and, since battery technology continues to advance, we may incur inventory impairment losses in the future.

Income Taxes

We utilize the asset and liability method in accounting for income taxes. Deferred tax assets and liabilities reflect the estimated future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax expense or benefit is the result of changes in the deferred tax asset and liability. Valuation allowances are established when necessary to reduce deferred tax assets where it is more likely than not that the deferred tax assets will not be realized. We make estimates, assumptions and judgments to determine its provision for its income taxes, deferred tax assets and liabilities, and any valuation allowance recorded against deferred tax assets. We assess the likelihood that our deferred tax assets will be recovered from future taxable income, and to the extent we believe that recovery is not likely, we established a valuation allowance.

We account for uncertain tax positions by reporting a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. Tax benefits are recognized from uncertain tax positions when we believe that it is more-likely-than-not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. We recognize interest and penalties, if any, related to unrecognized tax benefits in income tax expense.

Stock-Based Compensation

We recognize compensation expense on a straight-line basis over the service period that awards are expected to vest, based on the estimated fair value of the awards on the date of the grant. We recognize forfeitures as they occur. Fair value excludes the effect of non-market based vesting conditions. The fair value of RSUs with service conditions is based on the grant date share price. We estimate the fair value of options utilizing the Binomial-Lattice Model. The fair value of non-vested shares that vest based on market conditions are estimated using the Monte Carlo valuation method. These fair value estimates of stock related awards and assumptions inherent therein are estimates and, as a result, may not be reflective of future results or amounts ultimately realized by recipients of the grants. For these awards with performance conditions, we recognize compensation expense when the performance goals are achieved, or when it becomes probable that the performance goals will be achieved. Management performs the probability assessment on a quarterly basis by reviewing external factors, such as macroeconomic conditions and the analog industry revenue forecasts, and internal factors, such as our business and operational objectives and revenue forecasts. Changes in the probability assessment of achievement of the performance conditions are accounted for in the period of change by recording a cumulative catch-up adjustment as if the new estimate had been applied since the service inception date. As a result, our stock-based compensation expense is subject to volatility and may fluctuate significantly each quarter due to changes in our probability assessment of achievement of the performance conditions or actual results being different from projections made by management. Liability-classified awards are remeasured at lower of capped value or fair value as of each report date during settlement.

Loss of Emerging Growth Company Status

Under Section 102(b)(1) of the JOBS Act, emerging growth companies are exempt from complying with new or revised financial accounting standards until private companies are required to do so. The JOBS Act also allows companies to opt out of this extended transition period and follow the same reporting requirements as non-emerging growth companies, an election that is irrevocable once made.

As of December 31, 2024, the Company no longer qualifies as an emerging growth company. Consequently, we are now required to comply with new or revised accounting standards on the same timeline as public companies and are subject to the full regulatory and reporting requirements applicable to non-emerging growth companies under the JOBS Act.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis provides information that our management believes is relevant to an assessment and understanding of our consolidated results of operations and financial condition. The discussion should be read together with the historical consolidated financial statements and related notes that are included elsewhere in this Annual Report. This discussion may contain forward-looking statements based upon current expectations that involve risks and uncertainties.

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The Business

Microvast Holdings, Inc., an advanced battery technology company, is headquartered in Stafford, Texas, and publicly traded on the NASDAQ. We design, develop and manufacture battery components and systems primarily for electric commercial vehicles and utility-scale energy storage systems (“ESS”).

Founded in 2006, Microvast was built on a guiding principle that remains core to our mission today: to innovate lithium-ion battery design without relying on past technologies. We call this true innovation. We started without preconceived notions of lithium-ion battery creation, unlike many companies that repurposed legacy technologies for new markets like electric vehicles—a process we consider product development rather than true innovation. To understand this difference, is to understand what we have set out to achieve.

Our mission is to accelerate the adoption of electric vehicles and renewable energy through innovative battery technologies and solutions, driving the transition to a sustainable economy. Specifically, we aim to spearhead U.S. domestic battery production in what is a strategically vital sector and allowing over time for the reliance on supplies from overseas manufacturers to be reduced. We believe continuous investment in our technology and operations will deliver long-term targeted revenue and income growth.

Through a vertically integrated approach, we have developed proprietary technologies spanning the entire battery system, from basic cell materials (cathode, anode, electrolyte, separator) to cooling systems and software controls. Since our inception, we have primarily focused on developing new battery solutions for the transportation industry which requires batteries that are ultra-fast charging, high energy density, long-lasting and safe.

In the future, in addition to expanding our production of battery systems and battery components, we expect to increase our focus on producing ESS solutions to support the shift to electrification, with the goal of becoming a leading global ESS solution provider to the energy market. This necessity stems from the premise that electric vehicles are truly green only if powered by green energy. Addressing this symbiotic relationship is at the heart of our research activities and we expect it will shape our strategies for the foreseeable future.

Our most recent innovation is our high-energy nickel manganese cobalt (“NMC”) 53.5 ampere-hour battery cell (the “53.5Ah”), whose performance characteristics make it an ideal solution for commercial vehicle and ESS applications. To bring this product to market we have made significant investments in capacity expansion in Huzhou, China. This facility employs fully-automated production equipment for the 53.5Ah cell, ensuring significant operating efficiencies.

We have also made significant investments in our capacity expansion in Clarksville, Tennessee and by the fourth quarter of 2023 had started to install certain sections of the production line. However, progress on certain third party construction workstreams as well as taking delivery and possession of further equipment started to be impacted toward the end of the fourth quarter due to the required funding to complete the project not being secured. We expect the 53.5Ah cell to be our dominant revenue driver for this next phase of our growth.

Since 2009, when we launched our first ultra-fast battery system, we have sold and delivered approximately 4,487.5 megawatt hours (“MWh”) of battery systems. Our revenue for the year ended December 31, 2023, increased $102.1 million to $306.6 million, a 50% increase compared to the year ended December 31, 2022. As of December 31, 2023, our battery systems had an order backlog of about $276.4 million (equivalent to approximately 1,637.9 MWh), with nearly 84% attributable to Europe and the U.S.. We expect to fulfill a majority of our backlog within 2024 and 2025.

Completion of the Business Combination

On July 23, 2021, Microvast Holdings, Inc. (formerly known as Tuscan Holdings Corp.) consummated the previously announced acquisition of Microvast, Inc., a Delaware corporation, pursuant to the Agreement and Plan of Merger dated February 1, 2021, between Tuscan, Microvast and TSCN Merger Sub Inc., a Delaware corporation, pursuant to which Merger Sub merged with and into Microvast, with Microvast surviving the merger.

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Going Concern

In accordance with Accounting Standards Codification (“ASC”) Topic 205-40, Going Concern, we evaluate whether there are certain conditions and events, considered in the aggregate, that raise substantial doubt about our ability to continue as a going concern. This evaluation includes considerations related to our liquidity. Given the uncertainties around our liquidity as described in the Risk Factors and in Management's Discussion and Analysis of Financial Condition and Results of Operations, we have concluded that there is substantial doubt about our ability to continue as a going concern for at least one year from the date of issuance of the consolidated financial statements included elsewhere in this Annual Report. For more information, see Note 2 to the audited consolidated financial statements of this Annual Report and Risk Factors "There is substantial doubt regarding our our ability to continue as a going concern", "We may be unable to meet our current capital requirements and will require additional capital to meet our outstanding accounts payable and current liabilities" and "Because substantially all of our revenues are currently derived from outside of the U.S. and the significant costs and restrictions associated with the repatriation of cash from our non-U.S. operations, we may not have sufficient cash flow to cover our liabilities, which may result in a material adverse effect on the Company's business".

Subsequent Events

See Note 29 to the audited consolidated financial statements of this Annual Report.

Key Factors Affecting Our Performance

We believe that our future success will be dependent on several factors, including those discussed below. While these areas represent opportunities for us, they also represent challenges and risks that we must successfully address in order to continue the growth of our business and improve our results of operations.

Technology and Product Innovation

Our financial performance is driven by development and sales of new products with innovative technology. Our ability to develop innovative technology has been and will continue to be dependent on our dedicated research team. As part of our efforts to develop innovative technology, in October 2021, we expanded our R&D footprint in Orlando by purchasing a 75,000 square foot facility dedicated to R&D. We plan to continue expanding our R&D presence in the U.S. We also plan to continue leveraging our knowledge base in our overseas locations, including China and to continue expanding our R&D efforts on a global basis. We expect our results of operations will continue to be impacted by our ability to develop new products with improved performance and reduced ownership cost, as well as the cost of our R&D efforts.

Market Demand

Our revenue and profitability depend substantially on the demand for battery systems and battery components, which is driven by the growth of the commercial and passenger electric vehicle and energy storage markets. Many factors contribute to the development of the electric vehicle and battery energy storage sector, including product innovation, general economic and political conditions, environmental concerns, energy demand, government support and economic incentives(e.g., the IRA in the U.S. and the E.U. Green Deal, E.U. Fit for 55). While governmental economic incentives and mandates can drive market demand for the markets in which we operate and, as a result, battery systems and components, governmental economic incentives can always be gradually reduced or eliminated. Any reduction or elimination of governmental economic incentives may result in reduced demand for our products and adversely affect our financial performance.

Manufacturing Capacity

Our growth depends on being able to meet anticipated demand for our products. In order to do this, we will need to increase our manufacturing capacity. As of December 31, 2023, we had a backlog of approximately $276.4 million for our battery systems, equivalent to approximately 1,637.9 MWh. So far we have used $425.6 million of the proceeds from the Business Combination to expand our manufacturing facilities in order to increase our manufacturing output, enabling us to address our backlog and to capture growing market opportunities.

In the third quarter of 2023, we successfully completed the 2 GWh cell, module and tray capacity expansion for our 53.5Ah cell technology in Huzhou, China. The demand for our 53.5Ah cell technology from our commercial vehicle and ESS customer base will be primarily met from this facility until the Clarksville Phase 1A expansion is completed and

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in production. Subject to our ability to access additional financing to continue and complete this expansion, management now estimates that Clarksville Phase 1A will be producing qualified 53.5Ah cells beginning approximately eight months after we secure such financing.

The main reason for this delay is that the funding we had hoped to secure was not in place by the fourth quarter of 2023. Although we had started our fund raising efforts during the first quarter of 2023, in the expectation we would be able to secure a favorable financing before the end of the year, we experienced a number of events during the year that prospective lenders regarded as negatively changing the risk profile of providing a debt financing to the Company. Notable amongst these were the DOE's decision to withdraw the grant award in the second quarter of 2023 and most recently the report issued by J Capital in the fourth quarter of 2023.

Without access to debt financing we were unable to progress the Clarksville Phase 1A expansion project on its intended timetable, and further progress is still contingent on having full access to funding to complete the remaining project work.

Future capacity expansions, will require significant capital expenditures and will require a corresponding expansion of our supporting infrastructure, further development of our sales and marketing team, an expansion of our customer base and strengthened quality control. This capacity expansion will be carried out in a measured manner based on our ongoing assessment of medium- and long-term demand for our solutions.

Sales Geographic Mix

After initially being focused on the Asia & Pacific regions, we have expanded and continue to expand our presence and product promotion to Europe and the U.S. to capitalize on the rapidly growing electric vehicle and battery energy storage markets in those geographies. As we continue to expand our geographic focus to Europe and the U.S., we believe sales of our products in Europe and the U.S. will have the potential to generate higher gross margins because average sales prices for customers in the U.S. and Europe are typically significantly higher than the average sales prices in China. It has been our experience that buyers in Europe and the U.S. are more motivated by the technologies and quality of our products than are buyers in China, making them less sensitive to the price of our products than are similarly situated buyers in China where we are also faced with intense competition from local Chinese battery manufacturers. Therefore, the geographic sources of our revenue will have an impact on our revenue and gross margins.

Manufacturing Costs

Our profitability may also be affected by our ability to effectively manage our manufacturing costs. Our manufacturing costs are affected by fluctuations in the price of raw materials. If raw material prices increase, we will have to offset these higher costs either through price increases to our customers or through productivity improvements. Our ability to control our raw materials costs is also dependent on our ability to negotiate with our suppliers for a better price and our ability to source raw materials from reliable suppliers in a cost-efficient manner. In addition, we expect that an increase in our sales volume will enable us to lower our manufacturing costs through economies of scale.

Regulatory Landscape

We operate in an industry that is subject to many established environmental regulations, which have generally become more stringent over time, particularly with respect to hazardous waste generation and disposal and pollution control. These regulations affect the cost of our products and our gross margins. We are also affected by regulations in our target markets, such as economic incentives to purchasers of electric vehicles, tax credits for electric vehicle manufacturers or developers of renewable energy projects, and economic penalties that may apply to a car manufacturer based on its fleet-wide emissions or more generally legislation aimed at reducing GHGs. Each of these regulations may expand the market size for both electric vehicles and energy storage , which would, in turn, benefit us. We have operations and sales in China, the Asia & Pacific region, Europe and the U.S. and, as a result, changes in trade restrictions and tariffs could impact our ability to meet projected sales or margins.

Basis of Presentation

We currently conduct our business through one operating segment. Our historical results are reported in accordance with U.S. GAAP and in U.S. dollars.

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Components of Results of Operations

Revenue

We derive revenue from the sales of our electric battery products, including LpTO, LpCO, MpCO, HpCO and HnCo battery power systems. While we have historically marketed and sold our products primarily in China and the wider Asia-Pacific region, we are also expanding our sales presence internationally. The following table sets forth a breakdown of our revenue by the major geographic regions in which our customers are located for the periods indicated:

We have historically derived a portion of our revenue in a given reporting period from a limited number of key customers, which have varied from period to period. For the year ended December 31, 2023, two customers accounted for 18% and 11% of our net revenues. In 2022, one customer accounted for 12% of our net revenues.

Cost of Revenues and Gross Profit

Cost of revenues includes direct and indirect materials, manufacturing overhead (including depreciation, freight and logistics), warranty reserves and expenses, provision for obsolete inventories, and labor costs and related personnel expenses, including stock-based compensation and other related expenses that are directly attributable to the manufacturing of products.

Gross profit is equal to revenue less cost of revenues. Gross profit margin is equal to gross profit divided by revenue.

Operating Expenses

Operating expenses consist of selling and marketing, general and administrative and R&D expenses.

Selling and marketing expenses. Selling and marketing expenses consist primarily of personnel-related costs associated with our sales and marketing functions, including salaries and stock-based compensation, and other expenses related to advertising and promotions of our products. We intend to hire additional sales personnel, initiate additional marketing programs and build additional relationships with our customers. Accordingly, we expect that our selling and marketing expenses will continue to increase in absolute dollars in the long term as we expand our business.

General and administrative expenses. General and administrative expenses consist primarily of personnel-related expenses associated with our executive, including stock-based compensation, legal, finance, human resource and IT functions, as well as fees for professional services, depreciation and amortization and insurance expenses. We expect to incur additional costs as we hire personnel and enhance our infrastructure to support the anticipated growth of our business.

R&D expenses. R&D expenses consist primarily of personnel-related expenses, including stock-based compensation, raw material expenses relating to materials used for experiments, utility expenses and depreciation expenses attributable to R&D activities. Over time, we expect our R&D expense to increase in absolute dollars as we continue to make significant investments in developing new products, applications, functionality and other offerings.

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Subsidy Income

Government subsidies represent government grants received from local government authorities. The amounts of and conditions attached to each subsidy were determined at the sole discretion of the relevant governmental authorities. Our subsidy income is non-recurring in nature.

Other Income and Expenses

Other income and expenses consist primarily of the interest expense associated with our debt financing arrangements, interest income earned on our cash balances, gains and losses from foreign exchange conversion, and gains and losses on disposal of assets.

Income Tax Expense

We are subject to income taxes in the U.S. and the foreign jurisdictions in which we do business, namely China, Germany and the U.K. These foreign jurisdictions have statutory tax rates different from those in the U.S. Accordingly, our effective tax rates will vary depending on the relative proportion of foreign to U.S. income, the absorption of foreign tax credits, changes in the valuation of our deferred tax assets and liabilities and changes in tax laws. We regularly assess the likelihood of adverse outcomes resulting from the examination of our tax returns by the U.S. Internal Revenue Service and other tax authorities to determine the adequacy of our income tax reserves and expense. Should actual events or results differ from our current expectations, charges or credits to our income tax expense may become necessary. Any such adjustments could have a significant impact on our results of operations.

Income tax in China is generally calculated at 25% of the estimated assessable profit of our subsidiaries in China, except that two of our subsidiaries in China are qualified as “High and New Tech Enterprises” and thus enjoy a preferential income tax rate of 15%. The federal corporate income tax rate of 21% is applied for our U.S. entities. Our income tax in the U.K. is calculated at an average tax rate of 19% of the estimated assessable profit of our subsidiary in the U.K. The German enterprise income tax, which is a combination of corporate income tax and trade tax, is calculated at 29.9% of the estimated assessable profit of our subsidiary in Germany.

Results of Operations

This section of this Form 10-K generally discusses 2022 and 2023 items and year-to-year comparisons between 2022 and 2023. Discussions of 2021 items and year-to-year comparisons between 2021 and 2022 are not included in this Form 10-K, and can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Form 10-K filed on March 16, 2023.

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Comparison of the Year Ended December 31, 2022 to the Year Ended December 31, 2023

The following table sets forth our historical operating results for the periods indicated:

Revenue

Our revenue increased from approximately $204.5 million for the year ended December 31, 2022 to approximately $306.6 million for 2023 primarily driven by an increase in sales volume from approximately 694.2 MWh for year ended December 31, 2022 to approximately 1,139.6 MWh for the same period in 2023, which is due to the increase in the sales of battery cell products to new and existing customers in the Asia & Pacific region and Europe.

Cost of Revenue and Gross Profit

Our cost of revenues for the year ended December 31, 2023 increased 27.6% compared to the year ended December 31, 2022 as a result of our revenue increase, with the rate of increase being lower than the 49.9% increase in our revenues compared to the year ended December 31, 2022.

Our gross profit margin increased from 4.4% for the year ended December 31, 2022 to 18.7% for the same period in 2023. The increase in gross margin was primarily due to improving utilization, more favorable product mix, lower raw material prices, and decreased share-based compensation expenses.

Operating Expense

Selling and Marketing

Selling and marketing expenses for the year ended December 31, 2023 increased $1.0 million, or 4.4%, compared to the same period in 2022. The increase in selling and marketing expenses was primarily due to $2.0 million of increased

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headcount and other increases related to business expansion, offset by $2.8 million of decreased share-based compensation expenses.

General and Administrative

General and administrative expenses for the year ended December 31, 2023 decreased $7.3 million, or 7.0%, compared to the same period in 2022. The decrease in General and administrative expenses was primarily due to $23.4 million of decreased share-based compensation expenses, offset by $5.8 million of increased headcount, $3.3 million of increased IT and software expenses and other increases related to business expansion.

Research and Development

R&D expenses for the year ended December 31, 2023 increased $1.5 million, or 3.4%, compared to the same period in 2022. The increase in Research and Development was primarily due to $5.7 million of increased personnel-related expenses as we increased headcount in our research team as a result of our efforts to further develop and enhance our products, offset by $2.9 million of decreased share-based compensation expenses and $2.1 million of decreased costs of materials used for experiments.

Subsidy Income

Subsidy income increased from $1.7 million for the year ended December 31, 2022 to $2.0 million in the same period in 2023. The amounts are the one-time awards granted by local governments in 2022 and 2023.

Gain on change in fair value of warrant liability

For the year ended December 31, 2023, we recorded a gain of $0.1 million due to the change in fair value of warrant liability compared to a gain of $1.0 million in the same period of 2022, primarily because of the fair value fluctuation of our warrants.

Liquidity and Capital Resources

Since inception, we have financed our operations primarily from capital contributions from equity holders, issuance of convertible notes and bank borrowings.

As of December 31, 2023, our principal sources of liquidity were our cash and cash equivalents, restricted cash and short-term investments in the amount of $93.8 million.

The consolidated net cash position of $88.2 million as of December 31, 2023 included cash and cash equivalents of $22.3 million, $10.4 million and $0.2 million held by our China, German and UK subsidiaries, respectively, that is not available to fund domestic operations unless funds are repatriated. Should we need to repatriate to the U.S. part or all of the funds held by our international subsidiaries in the form of a dividend, we would need to accrue and pay withholding taxes. We do not intend to pay any cash dividends on our common stock in the foreseeable future and intend to retain all of the available funds and any future earnings for use in the operation and expansion of our business in China, the E.U. and the U.S.

In accordance with Accounting Standards Update ("ASU") No. 2014-15, “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (Subtopic 205-40),” management has evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date of the condensed consolidated financial statements are issued and has determined that the Company’s ability to continue as a going concern is dependent on its ability to raise additional capital. In light of the Company’s projected capital expenditures required to complete and ramp-up its Clarksville Phase 1A expansion and operating requirements under its current business plan, the Company is projecting that its existing cash and assets available for sale and equity securities will not be sufficient to fund its operations through the next twelve months. These conditions and events raise substantial doubt about the Company’s ability to continue as a going concern.

To alleviate the conditions and events that raise substantial doubt about the Company’s ability to continue as a going concern, management is seeking to secure a loan intended to support the Tennessee capacity expansion for which the amount may be disbursed in multiple advances. As of the date of issuance of the financial statements, the Group is in the process of negotiating a credit agreement of $150 million with the lender (the “Proposed Term Loan”) with a maturity term

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of 4 years after closing. Under the Proposed Term Loan, advances are subject to the satisfaction or waiver of a number of conditions, including but not limited to the delivery of certain customary certifications, as well as opinions from its legal counsel as to certain matters related to the applicability and availability of certain tax credits and enforceability, the assignment to a US subsidiary of certain assets related to the Tennessee project and payment to the lender of certain upfront fees and expenses. Additionally, prior to finalizing the Proposed Term Loan, certain other arrangements have to be negotiated, which include but are not limited to, entering into a $30 million working capital loan simultaneously with the Proposed Term Loan. The Company is in process of negotiating those arrangements. We may not reach a final agreement with the lender or be able to meet all of the conditions precedent to get advances of the loan under the Proposed Term Loan if entered into. There also may be a delay in getting advances of the Proposed Term Loan thereby necessitating additional bridge funding to be obtained by the Company.

Besides the Proposed Term Loan, the Company is currently evaluating several different other funding initiatives. Such initiatives in consideration include the issuance of debt or equity instruments and/or the sale or disposal of certain US real estate assets that are not integral to its cell manufacturing or assembly operations.

In addition to the above, the Company has selected and the Board of Directors has approved to engage an investment bank to assess strategic alternatives, provide advisory services and to solicit additional financing from third-party sources.

The amount of additional capital that the Company will need to raise may change based on changes to the Company’s business plan and changes to management’s assumptions regarding projected liquidity. Although the Company has been successful in raising capital in the past and expects to continue to raise capital as required, those plans are not final and are subject to market and other conditions not within the Company’s control. As such, there can be no assurance that the Company will be successful in obtaining sufficient funding. Accordingly, management has concluded under the accounting standards that these plans do not alleviate substantial doubt about the Company’s ability to continue as a going concern.

Financings

As of December 31, 2023, we had bank borrowings of $79.2 million, the terms of which range from three months to three years. The interest rates of our bank borrowings ranged from 3.40% to 4.60% per annum. As of December 31, 2023, we had convertible bonds of $43.2 million, with interest rates ranging from 3% to 4%. The convertible bonds are due in 2027. As of December 31, 2023, we were in compliance with all material terms and covenants of our loan agreements, credit agreements and bonds.

On July 23, 2021, we received $708.4 million from the completion of the Business Combination, $705.1 million net of transaction costs paid by Microvast, Inc. We have used $425.6 million of the net proceeds from the Business Combination to expand our manufacturing facilities and for the purchase of property and equipment associated with our existing manufacturing and R&D facilities. In addition, $132.8 million of the net proceeds were used for working capital as of December 31, 2023.

The exercise price for our outstanding warrants is $11.50 per share of common stock, and the trading price of our common stock was $0.767 as of March 25, 2024. There is no guarantee that the warrants will be exercised prior to their expiration, however, we do not expect this to impact our liquidity.

Capital expenditures and other contractual obligations

Our capital expenditures amounted to $150.9 million and $186.8 million for the years ended December 31, 2022 and 2023, respectively. Our capital expenditures in 2022 and 2023 related primarily to the construction of manufacturing facilities under our Clarksville Phase 1A expansion and Huzhou, China.

In 2021, we started our capacity expansion plans in Huzhou, China, Berlin, Germany and Clarksville, Tennessee. The project in Germany was completed in 2021. The China Phase 3.1 capacity expansion was successfully completed in the third quarter of 2023.

Because of delays in securing additional financing, including our fund-raising process being negatively impacted by the loss of the DOE grant, in the fourth quarter of 2023 we experienced slow progress in continuing construction of our Clarksville Phase 1A expansion, slowing down certain project work streams due to the need for additional financing. This has resulted in further delays and costs with negative effects on our liquidity and ability to meet accounts payable,

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especially for our U.S. operations. The proceeds from the Business Combination alone will not be sufficient to complete the Clarksville Phase 1A capacity expansion and meet our general working capital needs and due to foreign restrictions and adverse tax consequences as well as the working capital needs of MPS China, we are unable to repatriate cash from China to pay our accounts payable in the U.S. and fund the continued expansion of our U.S. operations. We are seeking alternate sources of capital. Until financing is in place, this will limit our growth opportunities especially in the U.S. market where our customers desire products that meet their domestic content requirements. Also, we will be forgoing potential IRA credits until such time as the Clarksville Phase 1A expansion is in operation.

We expect the total capital expenditures related to these capacity expansions in Huzhou, China and Clarksville, Tennessee to be in the range of $480.0 million to $530.0 million. Our planned capital expenditures are based on management’s current estimates and may be subject to change. There can be no assurance that we will execute our capital expenditure plans as contemplated at or below-estimated costs, and we may also from time-to-time determine to undertake additional capital projects and incur additional capital expenditures. As a result, actual capital expenditures in future years may be more or less than the amounts shown.

Our future capital requirements will depend on many factors, including, but not limited to funding planned production capacity expansions and for general working capital. In addition, we may in the future enter into arrangements to acquire or invest in complementary businesses or technologies. We may need to seek additional equity or debt financing in order to meet these future capital requirements. If we are unable to raise additional capital when desired, or on terms that are acceptable to us, our business, financial condition and results of operations could be adversely affected. There are no material off-balance sheet arrangements other than those described below.

Lease Commitments

We lease certain facilities and equipment under non-cancellable lease agreements that expire at various dates through 2036. For additional information, see Note 17 – Leases, in the notes to the unaudited condensed consolidated financial statements in Part II, Item 8 of this Report on Form 10-K.

Purchase Commitments

We regularly enter into non-cancelable contractual obligations primarily related to purchases of inventory. As of December 31, 2023, such purchase commitments, which do not qualify for recognition on our Consolidated Balance Sheets, amount to $52.6 million, most of which is short-term.

Cash Flows

The following table provides a summary of our cash flow data for the years indicated:

Cash Flows from Operating Activities

During the year ended December 31, 2023, our operating activities used $75.3 million in cash. This cash consisted of (1) a net loss of $106.4 million and non-cash charges of $109.6 million, of which $22.1 million is depreciation of property, plant and equipment and $65.0 million is non-cash share-based compensation expense; and (2) a $78.5 million decrease in cash flows from operating assets and liabilities including $47.1 million cash outflow due to the net increase of accounts receivable and notes receivable and $74.4 million increase in inventories, $7.7 million cash out from accrued and other liabilities and prepaid expense and other current assets, $14.4 million cash outflow from other operating assets and liabilities, partially offset by $65.1 million increase in accounts payable and notes payable .

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During the year ended December 31, 2022, our operating activities used $53.9 million in cash. This decrease in cash consisted of (1) a net loss of $158.2 million and non-cash charges of $134.7 million, of which $19.8 million is depreciation of property, plant and equipment and $90.8 million is non-cash share-based compensation expense; and (2) a $30.4 million decrease in cash flows from operating assets and liabilities including $35.7 million cash outflow due to the net increase of accounts receivable and notes receivable and $43.7 million increase in inventories, $21.0 million decrease in accrued and other liabilities and prepaid expense and other current assets, partially offset by $20.6 million increase in accounts payable and notes payable and $49.4 million cash inflow from other operating assets and liabilities.

Cash Flows from Investing Activities

During the year ended December 31, 2023, cash used in investing activities totaled $165.6 million. This cash outflow primarily consisted of $186.8 million of capital expenditures related to the expansion of our manufacturing facilities and to the purchase of property and equipment associated with our existing manufacturing and R&D facilities, and $5.9 million of purchase of short-term investments, offset by $25.5 million of the proceeds from maturity of short-term investments and $1.6 million of the proceeds on disposal of property, plant and equipment.

During the year ended December 31, 2022, cash used in investing activities totaled $175.9 million. This cash outflow primarily consisted of $150.9 million of capital expenditures related to the expansion of our manufacturing facilities and to the purchase of property and equipment associated with our existing manufacturing and R&D facilities, and $25.0 million of purchase of short-term investments.

Cash Flows from Financing Activities

During the year ended December 31, 2023, cash generated by financing activities totaled $33.0 million. This cash inflow was a result of $47.8 million proceeds from bank borrowings partially offset by $14.1 million repayment on bank borrowings and $0.7 million partial repayment on outstanding bonds.

During the year ended December 31, 2022, cash generated by financing activities totaled $5.0 million. This cash inflow was a result of $58.7 million proceeds from bank borrowings partially offset by $24.5 million repayment on bank borrowings and $29.2 million partial repayment on outstanding bonds.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses, and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates.

We believe the following critical accounting policies involve a higher degree of judgment and complexity than our other accounting policies. Therefore, these are the policies we believe are the most critical to understanding and evaluating our consolidated financial condition and results of operations.

Product Warranty

We provide product warranties, which entail the repair or replacement of non-conforming items, in conjunction with sales of products. Estimated costs related to warranties are recorded in the period in which the related product sales occur. The warranty liability recorded at each balance sheet date reflects management’s best estimates of its product warranties based on historical information and other currently available evidence.

Our product warranties generally range from one to eight years. We establish a reserve for the estimated cost of the product warranty at the time revenue is recognized. The portion of the warranties we expect to incur within the next 12 months is recorded in accrued expenses and other current liabilities, while the remainder is recorded in other non-current liabilities on the consolidated balance sheets. Warranty reserves are recorded as a cost of revenue.

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Inventories

Inventories are stated at the lower of cost or net realizable value. Cost is determined using the weighted average method. Inventory levels are analyzed periodically and written down to their net realizable value if they have become obsolete, have a cost basis in excess of expected net realizable value or are in excess of expected demand. We analyze current and future product demand relative to the remaining product life to identify potential excess inventories. These forecasts of future demand are based upon historical trends and analysis as adjusted for overall market conditions. Inventory write-downs are measured as the difference between the cost of the inventory and its net realizable value, and charged to inventory reserves, which is a component of cost of revenue. At the point of the loss recognition, a new, lower cost basis for those inventories is established, and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis. We recorded inventory impairment losses of $4.8 million and $3.6 million during the years ended December 31, 2022 and 2023, respectively. We monitor the inventory impairments periodically and, since battery technology continues to advance, we may incur inventory impairment losses in the future.

Income Taxes

We utilize the asset and liability method in accounting for income taxes. Deferred tax assets and liabilities reflect the estimated future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax expense or benefit is the result of changes in the deferred tax asset and liability. Valuation allowances are established when necessary to reduce deferred tax assets where it is more likely than not that the deferred tax assets will not be realized. We make estimates, assumptions and judgments to determine its provision for its income taxes, deferred tax assets and liabilities, and any valuation allowance recorded against deferred tax assets. We assess the likelihood that our deferred tax assets will be recovered from future taxable income, and to the extent we believe that recovery is not likely, we established a valuation allowance.

We account for uncertain tax positions by reporting a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. Tax benefits are recognized from uncertain tax positions when we believe that it is more-likely-than-not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. We recognize interest and penalties, if any, related to unrecognized tax benefits in income tax expense.

Stock-Based Compensation

We recognize compensation expense on a straight-line basis over the service period that awards are expected to vest, based on the estimated fair value of the awards on the date of the grant. We recognize forfeitures as they occur. Fair value excludes the effect of non-market based vesting conditions. The fair value of RSUs with service conditions is based on the grant date share price. We estimate the fair value of options utilizing the Binomial-Lattice Model. The fair value of non-vested shares that vest based on market conditions are estimated using the Monte Carlo valuation method. These fair value estimates of stock related awards and assumptions inherent therein are estimates and, as a result, may not be reflective of future results or amounts ultimately realized by recipients of the grants. For these awards with performance conditions, we recognize compensation expense when the performance goals are achieved, or when it becomes probable that the performance goals will be achieved. Management performs the probability assessment on a quarterly basis by reviewing external factors, such as macroeconomic conditions and the analog industry revenue forecasts, and internal factors, such as our business and operational objectives and revenue forecasts. Changes in the probability assessment of achievement of the performance conditions are accounted for in the period of change by recording a cumulative catch-up adjustment as if the new estimate had been applied since the service inception date. As a result, our stock-based compensation expense is subject to volatility and may fluctuate significantly each quarter due to changes in our probability assessment of achievement of the performance conditions or actual results being different from projections made by management. Liability-classified awards are remeasured at lower of capped value or fair value as of each report date during settlement.

Emerging Growth Company Status

Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can choose not to take advantage of the extended transition

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period and comply with the requirements that apply to non-emerging growth companies, and any such election to not take advantage of the extended transition period is irrevocable.

We are an “emerging growth company” as defined in Section 2(a) of the Securities Act of 1933, as amended (the “Securities Act”) as our last fiscal year revenue was less than $1.235 billion. We have elected to take advantage of the benefits of the extended transition period for new or revised financial accounting standards, although we may decide to adopt early such new or revised accounting standards to the extent permitted by such standards. This may make it difficult or impossible to compare our financial results with the financial results of another public company that is either not an emerging growth company or is an emerging growth company that has chosen not to take advantage of the extended transition period exemptions as a result of the potential differences in accounting standards used.

We will remain an emerging growth company until the earliest of (a) the last day of the fiscal year during which we have total annual gross revenues of at least $1.235 billion; (b) the last day of our fiscal year following the fifth anniversary of the completion of our IPO; (c) the date on which we have, during the preceding three-year period, issued more than $1.0 billion in non-convertible debt; or (d) the date on which we are deemed to be a “large accelerated filer” under the Exchange Act, which would occur if the market value of our common stock held by non-affiliates is at least $700 million as of the last business day of our most recently completed second fiscal quarter. Once we cease to be an emerging growth company, we will not be entitled to the exemptions provided in the JOBS Act discussed above.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis provides information that our management believes is relevant to an assessment and understanding of our consolidated results of operations and financial condition. The discussion should be read together with the historical consolidated financial statements and related notes that are included elsewhere in this Annual Report. This discussion may contain forward-looking statements based upon current expectations that involve risks and uncertainties.

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The Business

Microvast Holdings, Inc. is an advanced battery technology company headquartered near Houston, Texas, and is publicly traded on the NASDAQ stock exchange (the “NASDAQ”). We design, develop and manufacture battery components and systems primarily for electric commercial vehicles and utility-scale energy storage systems (“ESS”).

When we founded Microvast in 2006, our guiding principle, which remains at the heart of everything we do today, was to adopt an innovative and creative approach to the design of lithium-ion batteries without relying on past technologies. We call this true innovation. Our design approach began without preconceptions on how to make a lithium-ion battery, which contrasts to many other battery companies which took legacy battery technologies used in consumer electronics and adopted those for use in new market opportunities, such as electric vehicles, which we believe is product development, not innovation. To understand this difference, is to understand what we have set out to achieve.

Our mission is to use our innovative approach to create the battery technologies and solutions to accelerate the adoption of electric vehicles and the integration of renewable energy sources in order to power the transition to a sustainable economy. In particular, we seek to lead the charge in establishing and securing U.S. domestic battery production, which will strengthen the U.S. battery manufacturing base and reduce reliance on foreign battery manufacturing, in what is becoming a sector with significant strategic importance. We believe continuous investment in our technology and operations will deliver long-term targeted revenue and income growth.

We have developed proprietary technologies covering the entire battery system through our vertically integrated approach: from basic cell materials like the cathode, anode, electrolyte and separator, to cooling systems and software controls for the battery pack. Since our inception, we have primarily focused on developing new battery solutions for the transportation industry which requires batteries that are ultra-fast charging, high energy density, long lasting and safe.

In the future, in addition to expanding our production of battery systems and battery components, we expect to increase our focus on producing ESS solutions to support the shift to electrification, with the goal of becoming a leading global ESS solution provider to the energy market. This is a necessity because electric vehicles can only be considered as a green technology if the energy used to power them is also green. Addressing this symbiotic relationship is at the heart of our research activities and we expect it will shape our strategies for the foreseeable future.

Our most recent innovation is our high-energy nickel manganese cobalt (“NMC”) 53.5 ampere-hour battery cell (the “53.5Ah”), whose performance characteristics make it an attractive solution for commercial vehicle and ESS applications. To bring this product to market we have made significant investments in capacity expansions in Huzhou, China and Clarksville, Tennessee. Both facilities are using the same fully-automated production equipment for the 53.5Ah cell which will give us considerable operating efficiencies. We expect the 53.5Ah cell to be our dominant revenue driver for this next phase of our growth.

Since 2009, when we launched our first ultra-fast battery system, we have sold and delivered approximately 3,347.9 megawatt hours (“MWh”) of battery systems. Our revenue for the year ended December 31, 2022, increased $52.5 million to $204.5 million, a 35% increase compared to the year ended December 31, 2021. As of December 31, 2022, we had an order backlog of approximately $410.5 million for our battery systems (the equivalent of approximately 1,599.7 MWh), nearly 90% of which is attributable to the U.S. and Europe. We expect to fulfill a majority of our backlog within 2023 and 2024.

Recent Developments

On October 3,2022, we launched our new energy division (“Microvast Energy”). The new division will design, develop and manufacture ESS containers that are co-located with solar solutions or operate as stand-alone energy assets using our battery technology. The engineering, sales, after-sales and marketing and customer care departments for Microvast Energy are headquartered in northern Colorado.

Further, in October 2022, we were notified by the DOE that we had been selected, in collaboration with General Motors, to receive $200 million in grant funding as part of the DOE's Battery Materials Processing and Battery Manufacturing initiative pursuant to the recently enacted infrastructure law, subject to negotiation of specific terms. Once finalized, the grant funding will remain subject to certain conditions precedent and other terms and conditions to be agreed

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between us and the DOE. The grant funding is expected to support the construction of a new polyaramid separator manufacturing facility in the U.S.

Completion of the Business Combination

On July 23, 2021, Microvast Holdings, Inc. (formerly known as Tuscan Holdings Corp.) consummated the previously announced acquisition of Microvast, Inc., a Delaware corporation, pursuant to the Agreement and Plan of Merger dated February 1, 2021, between Tuscan, Microvast and TSCN Merger Sub Inc., a Delaware corporation, pursuant to which Merger Sub merged with and into Microvast, with Microvast surviving the merger.

Subsequent Events

See Note 29 to the audited consolidated financial statements of this Annual Report.

Key Factors Affecting Our Performance

We believe that our future success will be dependent on several factors, including those discussed below. While these areas represent opportunities for us, they also represent challenges and risks that we must successfully address in order to continue the growth of our business and improve our results of operations.

Technology and Product Innovation

Our financial performance is driven by development and sales of new products with innovative technology. Our ability to develop innovative technology has been and will continue to be dependent on our dedicated research team. As part of our efforts to develop innovative technology, in October 2021, we expanded our R&D footprint in Orlando by purchasing a 75,000 square foot facility dedicated to R&D. We plan to continue expanding our R&D presence in the U.S. We also plan to continue leveraging our knowledge base in our overseas locations, including China and to continue expanding our R&D efforts on a global basis. We expect our results of operations will continue to be impacted by our ability to develop new products with improved performance and reduced ownership cost, as well as the cost of our R&D efforts.

Market Demand

Our revenue and profitability depend substantially on the demand for battery systems and battery components, which is driven by the growth of the commercial and passenger electric vehicle and energy storage markets. Many factors contribute to the development of the electric vehicle and battery energy storage sector, including product innovation, general economic and political conditions, environmental concerns, energy demand, government support and economic incentives(e.g., the IRA in the U.S. and the E.U. Green Deal, E.U. Fit for 55). While governmental economic incentives and mandates can drive market demand for the markets in which we operate and, as a result, battery systems and components, governmental economic incentives can always be gradually reduced or eliminated. Any reduction or elimination of governmental economic incentives may result in reduced demand for our products and adversely affect our financial performance.

Manufacturing Capacity

Our growth depends on being able to meet anticipated demand for our products. In order to do this, we will need to increase our manufacturing capacity. As of December 31, 2022, we had a backlog of approximately $410.5 million for our battery systems, equivalent to approximately 1,599.7 MWh. So far we have used $238.8 million of the proceeds from the Business Combination to expand our manufacturing facilities in order to increase our manufacturing output, enabling us to address our backlog and to capture growing market opportunities, and we plan to spend in the range of $180 million to $210 million during 2023 on continued expansions of our facilities in Huzhou, China and Clarksville, Tennessee.

Future capacity expansions, which are already being planned, will require significant capital expenditures and will require a corresponding expansion of our supporting infrastructure, further development of our sales and marketing team, an expansion of our customer base and strengthened quality control. This capacity expansion will be carried out in a measured manner based on our ongoing assessment of medium- and long-term demand for our solutions.

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Sales Geographic Mix

After initially being focused on the Asia & Pacific regions, we have expanded and continue to expand our presence and product promotion to Europe and the U.S. to capitalize on the rapidly growing electric vehicle and battery energy storage markets in those geographies. As we continue to expand our geographic focus to Europe and the U.S., we believe sales of our products in Europe and the U.S. will have the potential to generate higher gross margins because average sales prices for customers in the U.S. and Europe are typically significantly higher than the average sales prices in China. It has been our experience that buyers in Europe and the U.S. are more motivated by the technologies and quality of our products than are buyers in China, making them less sensitive to the price of our products than are similarly situated buyers in China where we are also faced with intense competition from local Chinese battery manufacturers, some of which have state support. Therefore, the geographic sources of our revenue will have an impact on our revenue and gross margins.

Manufacturing Costs

Our profitability may also be affected by our ability to effectively manage our manufacturing costs. Our manufacturing costs are affected by fluctuations in the price of raw materials. If raw material prices increase, we will have to offset these higher costs either through price increases to our customers or through productivity improvements. Our ability to control our raw materials costs is also dependent on our ability to negotiate with our suppliers for a better price and our ability to source raw materials from reliable suppliers in a cost-efficient manner. In addition, we expect that an increase in our sales volume will enable us to lower our manufacturing costs through economies of scale.

Regulatory Landscape

We operate in an industry that is subject to many established environmental regulations, which have generally become more stringent over time, particularly with respect to hazardous waste generation and disposal and pollution control. These regulations affect the cost of our products and our gross margins. We are also affected by regulations in our target markets, such as economic incentives to purchasers of electric vehicles, tax credits for electric vehicle manufacturers or developers of renewable energy projects, and economic penalties that may apply to a car manufacturer based on its fleet-wide emissions or more generally legislation aimed at reducing GHGs. Each of these regulations may expand the market size for both electric vehicles and energy storage , which would, in turn, benefit us. We have operations and sales in China, the Asia & Pacific region, Europe and the U.S. and, as a result, changes in trade restrictions and tariffs could impact our ability to meet projected sales or margins.

COVID-19

To date, COVID-19 has had an adverse impact on our sales and operations. During 2022, we continued to face unanticipated challenges caused by the continued impact of the global pandemic and emerging variants of the virus, in particular due to continued lockdowns and other restrictive measures in China. These lockdowns did not have a direct impact on our manufacturing facility in Huzhou, China; however, they have impacted the operations of certain of our third-party suppliers and our ability to book transportation of goods. In addition, the lockdowns and other restrictive measures have significantly disrupted supply chains across many industries around the globe. These and future lockdown measures may impact our ability to produce and/or timely deliver goods and services to our clients globally and further disruptions to supply chains in the automotive or energy industry may continue to reduce and/or delay our customers' demand for our products and services. In addition, lengthy mandatory quarantine periods continue to restrict our ability to have non-China based employees and other invitees visit our facilities in China.

Basis of Presentation

We currently conduct our business through one operating segment. Our historical results are reported in accordance with U.S. GAAP and in U.S. dollars.

Components of Results of Operations

Revenue

We derive revenue from the sales of our electric battery products, including LpTO, LpCO, MpCO, HpCO and HnCo battery power systems. While we have historically marketed and sold our products primarily in China and the wider

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Asia-Pacific region, we are also expanding our sales presence internationally. The following table sets forth a breakdown of our revenue by the major geographic regions in which our customers are located for the periods indicated:

We have historically derived a portion of our revenue in a given reporting period from a limited number of key customers, which have varied from period to period. For the year ended December 31, 2022, one customer accounted for 12% of our net revenues. In 2021, one customer accounted for 11% of our net revenues.

Cost of Revenues and Gross Profit

Cost of revenues includes direct and indirect materials, manufacturing overhead (including depreciation, freight and logistics), warranty reserves and expenses, provision for obsolete inventories, and labor costs and related personnel expenses, including stock-based compensation and other related expenses that are directly attributable to the manufacturing of products.

Gross profit is equal to revenue less cost of revenues. Gross profit margin is equal to gross profit divided by revenue.

Operating Expenses

Operating expenses consist of selling and marketing, general and administrative and R&D expenses.

Selling and marketing expenses. Selling and marketing expenses consist primarily of personnel-related costs associated with our sales and marketing functions, including salaries and stock-based compensation, and other expenses related to advertising and promotions of our products. We intend to hire additional sales personnel, initiate additional marketing programs and build additional relationships with our customers. Accordingly, we expect that our selling and marketing expenses will continue to increase in absolute dollars in the long term as we expand our business.

General and administrative expenses. General and administrative expenses consist primarily of personnel-related expenses associated with our executive, including stock-based compensation, legal, finance, human resource and IT functions, as well as fees for professional services, depreciation and amortization and insurance expenses. We expect to incur additional costs as we hire personnel and enhance our infrastructure to support the anticipated growth of our business.

R&D expenses. R&D expenses consist primarily of personnel-related expenses, including stock-based compensation, raw material expenses relating to materials used for experiments, utility expenses and depreciation expenses attributable to R&D activities. Over time, we expect our R&D expense to increase in absolute dollars as we continue to make significant investments in developing new products, applications, functionality and other offerings.

Subsidy Income

Government subsidies represent government grants received from local government authorities. The amounts of and conditions attached to each subsidy were determined at the sole discretion of the relevant governmental authorities. Our subsidy income is non-recurring in nature.

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Other Income and Expenses

Other income and expenses consist primarily of the interest expense associated with our debt financing arrangements, interest income earned on our cash balances, gains and losses from foreign exchange conversion, and gains and losses on disposal of assets.

Income Tax Expense

We are subject to income taxes in the U.S. and the foreign jurisdictions in which we do business, namely China, Germany and the U.K. These foreign jurisdictions have statutory tax rates different from those in the U.S. Accordingly, our effective tax rates will vary depending on the relative proportion of foreign to U.S. income, the absorption of foreign tax credits, changes in the valuation of our deferred tax assets and liabilities and changes in tax laws. We regularly assess the likelihood of adverse outcomes resulting from the examination of our tax returns by the U.S. Internal Revenue Service and other tax authorities to determine the adequacy of our income tax reserves and expense. Should actual events or results differ from our current expectations, charges or credits to our income tax expense may become necessary. Any such adjustments could have a significant impact on our results of operations.

Income tax in China is generally calculated at 25% of the estimated assessable profit of our subsidiaries in China, except that two of our subsidiaries in China are qualified as “High and New Tech Enterprises” and thus enjoy a preferential income tax rate of 15%. The federal corporate income tax rate of 21% is applied for our U.S. entity. Our income tax in the U.K. is calculated at an average tax rate of 19% of the estimated assessable profit of our subsidiary in the U.K. The German enterprise income tax, which is a combination of corporate income tax and trade tax, is calculated at 27.9% of the estimated assessable profit of our subsidiary in Germany.

Results of Operations

This section of this Form 10-K generally discusses 2021 and 2022 items and year-to-year comparisons between 2021 and 2022. Discussions of 2020 items and year-to-year comparisons between 2020 and 2021 are not included in this

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Form 10-K, and can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Form 10-K filed on March 29, 2022.

Comparison of the Year Ended December 31, 2021 to the Year Ended December 31, 2022

The following table sets forth our historical operating results for the periods indicated:

Revenue

Our revenue increased from approximately $152.0 million for the year ended December 31, 2021 to approximately $204.5 million for 2022 primarily driven by an increase in sales volume from approximately 489.2 MWh for year ended December 31, 2021 to approximately 694.2 MWh for the same period in 2022, which is due to the increase in the sales of battery cell products to new and existing customers in the Asia & Pacific region and the U.S.

Cost of Revenue and Gross Profit

Our cost of sales for the year ended December 31, 2022 remained stable compared to the same period in 2021.

Our gross profit margin increased from negative 28.1% for the year ended December 31, 2021 to 4.4% for the same period in 2022. The increase in gross margin was primarily due to (i) better economies of scale resulting from increasing sales volume and (ii) $46.5 million of additional warranty cost for a legacy product that was accrued during 2021 not occurring in 2022. These improvements to gross margin were partially offset by (i) increases in raw material prices and (ii) $3.4 million of increased share-based compensation expenses.

Our legacy product that was sold during 2017 and 2018 to our China-based customers did not meet our high standards and experienced performance issues when in operation. Following a rigorous root cause analysis completed in October 2021, we determined that a component sourced from a third-party supplier was not meeting our performance standards. It is our expectation that the legacy product will need to be replaced before the expiration of the product warranty in their respective sales contracts with our customers. We believe this issue is limited to this legacy product,

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which we ceased selling in late 2018, as the component was not incorporated into any other products. Accordingly, the $46.5 million of additional accrual warranty cost for the legacy product during 2021 did not occur in 2022.

Operating Expense

Selling and Marketing

Selling and marketing expenses for the year ended December 31, 2022 increased $1.2 million, or 5.5%, compared to the same period in 2021. The increase in selling and marketing expenses was primarily due to $0.7 million of increased share-based compensation expenses and other increases related to business expansion.

General and Administrative

General and administrative expenses for the year ended December 31, 2022 increased $2.9 million, or 2.9%, compared to the same period in 2021. The increase in General and administrative expenses was primarily due to $7.8 million of increased share-based compensation expenses, $2.4 million of increased insurance fees after becoming a public company and other increases related to business expansion and other increases related to business expansion, offset by $6.9 million exchange gain and other expense saving.

Research and Development

R&D expenses for the year ended December 31, 2022 increased $9.1 million, or 26.5%, compared to the same period in 2021. The increase in R&D expenses was primarily due to (i) $3.9 million of increased personnel-related expenses as we increased headcount of our research team as a result of our efforts to further develop and enhance our products; (ii) $2.5 million of increased costs of materials used for experiments due to more testing activities, (iii) $0.9 million of increased share-based compensation expenses and (iv) other increases related to business expansion.

Subsidy Income

Subsidy income decreased from $6.1 million for the year ended December 31, 2021 to $1.7 million in the same period in 2022, primarily due to a one-time award granted by local governments in China in 2021.

Loss on changes in fair value of convertible notes

For the year ended December 31, 2021, we incurred a loss of $9.9 million due to changes in fair value of the convertible notes issued in January and February 2021 and converted to common stock upon the Business Combination on July 23, 2021. No such event occurred in 2022.

Gain on change in fair value of warrant liability

For the year ended December 31, 2022, we recorded a gain of $1.0 million due to the change in fair value of warrant liability compared to a gain of $2.5 million in the same period of 2021, primarily because of the fair value fluctuation of our warrants.

Liquidity and Capital Resources

Since inception, we have financed our operations primarily from capital contributions from equity holders, issuance of convertible notes and bank borrowings. We expect existing cash, cash equivalents, short-term marketable securities, cash flows from operations and financing activities to continue to be sufficient to fund our operating activities and cash commitments for investing and financing activities for at least the next 12 months and thereafter for the foreseeable future.

As of December 31, 2022, our principal sources of liquidity were our cash and cash equivalents, restricted cash and short-term investments in the amount of $327.7 million.

The consolidated net cash position as of December 31, 2022 included cash and cash equivalents of $1.3 million, $23.5 million and $0.5 million held by our China, German and UK subsidiaries, respectively, that is not available to fund domestic operations unless funds are repatriated. Should we need to repatriate to the U.S. part or all of the funds held by

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our international subsidiaries in the form of a dividend, we would need to accrue and pay withholding taxes. We do not intend to pay any cash dividends on our common stock in the foreseeable future and intend to retain all of the available funds and any future earnings for use in the operation and expansion of our business in China, the E.U. and the U.S.

We continue to assess the effect of the COVID-19 pandemic and the Russia/Ukraine crisis on our operations. The extent to which the COVID-19 pandemic will impact our business and operations will depend on future developments that are highly uncertain and cannot be predicted with confidence, such as the continuing spread of the infection, new and emerging variants of the virus, the duration of the pandemic, and the effectiveness of actions taken in the U.S. and other countries to contain and treat the disease. The extent to which the Russia/Ukraine crisis will impact our business and operations will also depend on future developments that are highly uncertain and cannot be predicted with confidence, including restrictive actions that may be taken by the U.S. and/or other countries, such as sanctions or export controls, and the duration of the conflict.

Financings

As of December 31, 2022, we had bank borrowings of $46.4 million, the terms of which range from three months to two years. The interest rates of our bank borrowings ranged from 4.50% to 4.80% per annum. As of December 31, 2022, we had convertible bonds of $43.9 million, with interest rates ranging from 3% to 4%. The convertible bonds are due in 2027. As of December 31, 2022, we were in compliance with all material terms and covenants of our loan agreements, credit agreements and bonds.

On July 23, 2021, we received $708.4 million from the completion of the Business Combination, $705.1 million net of transaction costs paid by Microvast, Inc. We have used $238.8 million of the net proceeds from the Business Combination to expand our manufacturing facilities and for the purchase of property and equipment associated with our existing manufacturing and R&D facilities. In addition, $54.3 million of the net proceeds were used for working capital as of December 31, 2022. We expect the total capital expenditures related to these capacity expansions in Huzhou, China and Clarksville, Tennessee to be in the range of $460.0 million to $490.0 million.

The exercise price for our outstanding warrants is $11.50 per share of common stock, and the trading price of our common stock was $1.20 as of March 10, 2023. There is no guarantee that the warrants will be exercised prior to their expiration, however, we do not expect this to impact our liquidity and we believe we will be able to meet our working capital requirements for at least the next 12 months and fund our expansion plans with proceeds from the Business Combination.

Capital expenditures and other contractual obligations

Our future capital requirements will depend on many factors, including, but not limited to funding planned production capacity expansions and for general working capital. We believe the proceeds from the Business Combination will be sufficient to cover our planned expansions and our general working capital needs. In addition, we may in the future enter into arrangements to acquire or invest in complementary businesses or technologies. We may need to seek additional equity or debt financing in order to meet these future capital requirements. If we are unable to raise additional capital when desired, or on terms that are acceptable to us, our business, financial condition and results of operations could be adversely affected. There are no material off-balance sheet arrangements other than those described below.

Lease Commitments

We lease certain facilities and equipment under non-cancellable lease agreements that expire at various dates through 2036. For additional information, see Note 17 – Leases, in the notes to the unaudited condensed consolidated financial statements in Part II, Item 8 of this Report on Form 10-K.

Purchase Commitments

We regularly enter into non-cancelable contractual obligations primarily related to purchases of inventory. As of December 31, 2022, such purchase commitments, which do not qualify for recognition on our Consolidated Balance Sheets, amount to $30.5 million, all of which is short-term.

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Our capital expenditures amounted to $87.9 million and $150.9 million for the years ended December 31, 2021 and 2022, respectively. Our capital expenditures in 2021 and 2022 related primarily to the construction of manufacturing facilities under our expansion plans for our facilities in Clarksville, Tennessee and Huzhou, China.

In 2021, we started our capacity expansion plans in Huzhou, China, Berlin, Germany and Clarksville, Tennessee. The project in Germany was completed in 2021, and the China and Tennessee projects are expected to be completed in the first and fourth quarters of 2023, respectively. The completion of these projects is expected to increase our existing production capacity by 4 GWh once operational. We expect the total capital expenditures related to these capacity expansions in Huzhou, China and Clarksville, Tennessee to be in the range of $460.0 million to $490.0 million, which we plan to finance primarily through the proceeds from the Business Combination and bank borrowings, which we believe will be sufficient to cover all of the disclosed and estimated costs.

Our planned capital expenditures are based on management’s current estimates and may be subject to change. There can be no assurance that we will execute our capital expenditure plans as contemplated at or below-estimated costs, and we may also from time-to-time determine to undertake additional capital projects and incur additional capital expenditures. As a result, actual capital expenditures in future years may be more or less than the amounts shown.

Cash Flows

The following table provides a summary of our cash flow data for the years indicated:

Cash Flows from Operating Activities

During the year ended December 31, 2022, our operating activities used $53.9 million in cash. This decrease in cash consisted of (1) a net loss of $158.2 million and non-cash charges of $134.7 million, of which $19.8 million is depreciation of property, plant and equipment and $90.8 million is non-cash share-based compensation expense; and (2) a $30.4 million decrease in cash flows from operating assets and liabilities including $35.7 million cash outflow due to the net increase of accounts receivable and notes receivable and $43.7 million increase in inventories, $21.0 million decrease in accrued and other liabilities and prepaid expense and other current assets, partially offset by $20.6 million increase in accounts payable and notes payable and $49.4 million cash inflow from other operating assets and liabilities.

During the year ended December 31, 2021, our operating activities used $45.0 million in cash. This decrease in cash consisted of (1) $21.1 million in cash paid after adjusting our net loss for non-cash and non-operating items, of which $20.0 million is depreciation of property, plant and equipment, $9.9 million loss on change in fair value of convertible notes, and $2.5 million gain on change in fair value of warrant; (2) $23.9 million decrease in cash flows from operating assets and liabilities including $1.8 million cash outflow due to increase of accounts receivable and notes receivable.

Cash Flows from Investing Activities

During the year ended December 31, 2022, cash used in investing activities totaled $175.9 million. This cash outflow primarily consisted of $150.9 million of capital expenditures related to the expansion of our manufacturing facilities and to the purchase of property and equipment associated with our existing manufacturing and R&D facilities, and $25.0 million of purchase of short-term investments.

During the year ended December 31, 2021, cash used in investing activities totaled $87.9 million. This cash outflow primarily consisted of capital expenditures related to the purchase of property and equipment in connection with our expansion plans.

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Cash Flows from Financing Activities

During the year ended December 31, 2022, cash generated by financing activities totaled $5.0 million. This cash inflow was a result of $58.7 million proceeds from bank borrowings partially offset by $24.5 million repayment on bank borrowings and $29.2 million partial repayment on outstanding bonds.

During the year ended December 31, 2021, cash provided by financing activities totaled $624.9 million. This cash inflow was a result of $38.9 million proceeds from bank borrowings, $57.5 million proceeds from the issuance of convertible notes to new investors and $222.6 million from the trust account upon consummation of the Business Combination, net of transaction costs, partially offset by $37.6 million repayment on bank borrowings, a $139.0 million repurchase of a minority interest in a subsidiary and $482.5 million from PIPE investors upon consummation of the Business Combination.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses, and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates.

We believe the following critical accounting policies involve a higher degree of judgment and complexity than our other accounting policies. Therefore, these are the policies we believe are the most critical to understanding and evaluating our consolidated financial condition and results of operations.

Product Warranty

We provide product warranties, which entail the repair or replacement of non-conforming items, in conjunction with sales of products. Estimated costs related to warranties are recorded in the period in which the related product sales occur. The warranty liability recorded at each balance sheet date reflects management’s best estimates of its product warranties based on historical information and other currently available evidence.

Our product warranties generally range from one to eight years. We establish a reserve for the estimated cost of the product warranty at the time revenue is recognized. The portion of the warranties we expect to incur within the next 12 months is recorded in accrued expenses and other current liabilities, while the remainder is recorded in other non-current liabilities on the consolidated balance sheets. Warranty reserves are recorded as a cost of revenue.

In 2021, as a result of the increases in the repairing cost and frequency of claims with respect to a legacy product sold in 2017 and 2018, we conducted intensive experiments and a root cause analysis, which was completed in October 2021. We concluded that a component purchased from a supplier was not meeting our performance standards. As a result, we expect that the impacted legacy products sold will need to be replaced before the expiration of warranty term. This reassessment resulted in a change in estimate for additional accrual of $46.5 million for such legacy product in 2021. As the component was not incorporated into other products, no additional accrual was made to other existing products sold.

Inventories

Inventories are stated at the lower of cost or net realizable value. Cost is determined using the weighted average method. Inventory levels are analyzed periodically and written down to their net realizable value if they have become obsolete, have a cost basis in excess of expected net realizable value or are in excess of expected demand. We analyze current and future product demand relative to the remaining product life to identify potential excess inventories. These forecasts of future demand are based upon historical trends and analysis as adjusted for overall market conditions. Inventory write-downs are measured as the difference between the cost of the inventory and its net realizable value, and charged to inventory reserves, which is a component of cost of revenue. At the point of the loss recognition, a new, lower cost basis for those inventories is established, and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis. We recorded inventory impairment losses of $18.3 million and $4.8 million during the years ended December 31, 2021 and 2022, respectively. We monitor the inventory impairments periodically and, since battery technology continues to advance, we may incur inventory impairment losses in the future.

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Income Taxes

We utilize the asset and liability method in accounting for income taxes. Deferred tax assets and liabilities reflect the estimated future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax expense or benefit is the result of changes in the deferred tax asset and liability. Valuation allowances are established when necessary to reduce deferred tax assets where it is more likely than not that the deferred tax assets will not be realized. We make estimates, assumptions and judgments to determine its provision for its income taxes, deferred tax assets and liabilities, and any valuation allowance recorded against deferred tax assets. We assess the likelihood that our deferred tax assets will be recovered from future taxable income, and to the extent we believe that recovery is not likely, we established a valuation allowance.

We account for uncertain tax positions by reporting a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. Tax benefits are recognized from uncertain tax positions when we believe that it is more-likely-than-not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. We recognize interest and penalties, if any, related to unrecognized tax benefits in income tax expense.

Stock-Based Compensation

We recognize compensation expense on a straight-line basis over the service period that awards are expected to vest, based on the estimated fair value of the awards on the date of the grant. We recognize forfeitures as they occur. Fair value excludes the effect of non-market based vesting conditions. The fair value of RSUs with service conditions is based on the grant date share price. We estimate the fair value of options utilizing the Binomial-Lattice Model. The fair value of non-vested shares that vest based on market conditions are estimated using the Monte Carlo valuation method. These fair value estimates of stock related awards and assumptions inherent therein are estimates and, as a result, may not be reflective of future results or amounts ultimately realized by recipients of the grants. For these awards with performance conditions, we recognize compensation expense when the performance goals are achieved, or when it becomes probable that the performance goals will be achieved. Management performs the probability assessment on a quarterly basis by reviewing external factors, such as macroeconomic conditions and the analog industry revenue forecasts, and internal factors, such as our business and operational objectives and revenue forecasts. Changes in the probability assessment of achievement of the performance conditions are accounted for in the period of change by recording a cumulative catch-up adjustment as if the new estimate had been applied since the service inception date. As a result, our stock-based compensation expense is subject to volatility and may fluctuate significantly each quarter due to changes in our probability assessment of achievement of the performance conditions or actual results being different from projections made by management. Liability-classified awards are remeasured at lower of capped value or fair value as of each report date during settlement.

Emerging Growth Company Status

Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can choose not to take advantage of the extended transition period and comply with the requirements that apply to non-emerging growth companies, and any such election to not take advantage of the extended transition period is irrevocable.

We are an “emerging growth company” as defined in Section 2(a) of the Securities Act of 1933, as amended (the “Securities Act”) as our last fiscal year revenue was less than $1.235 billion. We have elected to take advantage of the benefits of the extended transition period for new or revised financial accounting standards, although we may decide to adopt early such new or revised accounting standards to the extent permitted by such standards. This may make it difficult or impossible to compare our financial results with the financial results of another public company that is either not an emerging growth company or is an emerging growth company that has chosen not to take advantage of the extended transition period exemptions as a result of the potential differences in accounting standards used.

We will remain an emerging growth company until the earliest of (a) the last day of the fiscal year during which we have total annual gross revenues of at least $1.235 billion; (b) the last day of our fiscal year following the fifth anniversary of the completion of our IPO; (c) the date on which we have, during the preceding three-year period, issued

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more than $1.0 billion in non-convertible debt; or (d) the date on which we are deemed to be a “large accelerated filer” under the Exchange Act, which would occur if the market value of our common stock held by non-affiliates is at least $700 million as of the last business day of our most recently completed second fiscal quarter. Once we cease to be an emerging growth company, we will not be entitled to the exemptions provided in the JOBS Act discussed above.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis provides
information that our management believes is relevant to an assessment and understanding of our consolidated results of operations and
financial condition. The discussion should be read together with the historical consolidated financial statements and related notes that
are included elsewhere in this Annual Report. This discussion may contain forward-looking statements based upon current expectations that
involve risks and uncertainties.

Completion of the Business Combination

On July 23, 2021, Microvast Holdings, Inc. (formerly
known as Tuscan Holdings Corp.) consummated the previously announced acquisition of Microvast, Inc., a Delaware corporation, pursuant
to the Agreement and Plan of Merger dated February 1, 2021, between Tuscan Holdings Corp., Microvast and TSCN Merger Sub Inc., a Delaware
corporation, pursuant to which Merger Sub merged with and into Microvast, with Microvast surviving the merger.

Company’s Business following the Business Combination

We are a technology innovator for Li-ion batteries.
We design, develop and manufacture battery systems for electric vehicles and energy storage that feature ultra-fast charging capabilities,
long life and superior safety. Our vision is to solve the key constraints in electric vehicle development and in high-performance energy
storage applications. We believe the ultra-fast charging capabilities of our battery systems make charging electric vehicles as convenient
as fueling conventional vehicles. We believe that the long battery life of our battery systems also reduces the total cost of ownership
of electric vehicles and energy storage applications.

We offer our customers a broad range of cell chemistries,
including LTO, LFP, NMC-1 and NMC-2. Based on our customer’s application, we design, develop and integrate the preferred chemistry
into our cell, module and pack manufacturing capabilities. Our strategic priority is to offer these battery solutions for commercial vehicles
and energy storage systems. We define commercial vehicles as light, medium, heavy-duty trucks, buses, trains, mining trucks, marine applications,
automated guided and specialty vehicles. For energy storage applications, we focus on high-performance applications such as grid management
and frequency regulation.

Additionally, as a vertically integrated battery
company, we design, develop and manufacture the following battery components: cathode, anode, electrolyte and separator. We also market
our FCG cathode and polyaramid separator to passenger car OEMs and consumer electronics manufacturers.

As of December 31, 2021, we had a backlog order of approximately $114.5
million for our battery systems equivalent to approximately 444.8 MWh. Our revenue for the year ended December 31, 2021 increased $44.5
million, or 41.3%, to $152.0 million, compared to the year ended December 31, 2020.

After initially focusing on the PRC and the Asia
& Pacific region, we have expanded and continue to expand our presence and product promotion to Europe and the U.S. to capitalize
on their rapidly growing electrification markets. We have many prototype projects ongoing with regard to sports cars, commercial vehicles,
trucks, port equipment and marine applications with customers in the Western Hemisphere. In addition, we are jointly developing electric
power-train solutions with leading commercial vehicle OEMs and a first-tier automotive supplier using LTO, NMC1 and NMC2 technologies.

Subsequent Events

See Note 28 to the audited consolidated financial statements beginning
on page F-53 of this Annual Report.

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Key Factors Affecting Our Performance

We believe that our future success will be dependent
on several factors, including those discussed below. While these areas represent opportunities for us, they also represent challenges
and risks that we must successfully address in order to continue the growth of our business and improve our results of operations.

Technology and Product Innovation

Our financial performance is driven by development
and sales of new products with innovative technology. Our ability to develop innovative technology has been and will continue to be dependent
on our dedicated research team. As part of our efforts to develop innovative technology, in October 2021, we expanded our R&D footprint
in Orlando by purchasing a 75,000 square foot facility dedicated to R&D. We plan to continue expanding our R&D presence in the
U.S. We also plan to continue leveraging our knowledge base in the PRC and continue expanding our R&D efforts there as well. We expect
our results of operations will continue to be impacted by our ability to develop new products with improved performance and reduced ownership
cost, as well as the cost of our R&D efforts.

Market Demand

Our revenue and profitability depend substantially
on the demand for battery systems and battery components, which is driven by the growth of the commercial and passenger electric vehicle
and energy storage markets. Many factors contribute to the development of the electric vehicles sector, including product innovation,
general economic and political conditions, environmental concerns, energy demand, government support and economic incentives. While governmental
economic incentives and mandates can drive market demand for electric vehicles and, as a result, battery systems and components, governmental
economic incentives are being gradually reduced or eliminated. Any reduction or elimination of governmental economic incentives may result
in reduced demand for our products and adversely affect our financial performance.

Manufacturing Capacity

Our growth depends on being able to meet anticipated demand for our
products. In order to do this, we will need to increase our manufacturing capacity. As of December 31, 2021, we had a backlog of approximately
$114.5 million for our battery systems, equivalent to approximately 444.8 MWh. So far we have used $87.9 million of the proceeds from
the Business Combination to expand our manufacturing facilities in order to increase our manufacturing output enabling us to address our
backlog and to capture growing market opportunities, and we plan to spend approximately $446.0 million on continued expansions of our
facilities in Huzhou, China and Clarksville, Tennessee. Our planned capacity expansion will require significant capital expenditures and
will require a corresponding expansion of our supporting infrastructure, further development of our sales and marketing team, an expansion
of our customer base and strengthened quality control. This capacity expansion will be carried out in a measured manner based on our ongoing
assessment of medium- and long-term demand for our solutions.

Sales Geographic Mix

After initially being focused on the PRC and the
Asia & Pacific region, we have expanded and continue to expand our presence and product promotion to Europe and the U.S. to capitalize
on the rapidly growing electric vehicle markets in those geographies. As we continue to expand our geographic focus to Europe and the
U.S., we believe sales of our products in Europe and the U.S. will continue to generate higher gross margins because average sales prices
for customers in the U.S. and Europe are typically significantly higher than the average sales prices in the PRC. It has been our experience
that buyers in Europe and the U.S. are more motivated by the technologies and quality of our products than are buyers in the PRC, making
them less sensitive to the price of our products than are similarly situated buyers in the PRC. Therefore, the geographic sources of our
revenue will have an impact on our revenue and gross margins.

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Manufacturing Costs

Our profitability may also be affected by our ability
to effectively manage our manufacturing costs. Our manufacturing costs are affected by fluctuations in the price of raw materials. If
raw material prices increase, we will have to offset these higher costs either through price increases to our customers or through productivity
improvements. Our ability to control our raw materials costs is also dependent on our ability to negotiate with our suppliers for a better
price and our ability to source raw materials from reliable suppliers in a cost-efficient manner. In addition, we expect that an increase
in our sales volume will enable us to lower our manufacturing costs through economies of scale.

Regulatory Landscape

We operate in an industry that is subject to many
established environmental regulations, which have generally become more stringent over time, particularly with respect to hazardous waste
generation and disposal and pollution control. These regulations affect the cost of our products and our gross margins. We are also affected
by regulations in our target markets, such as economic incentives to purchasers of electric vehicles, tax credits for electric vehicle
manufacturers, and economic penalties that may apply to a car manufacturer based on its fleet-wide emissions. Each of these regulations
may expand the market size of electric vehicles, which would, in turn, benefit us. We have operations and sales in the PRC, the Asia &
Pacific region, Europe and the U.S. and, as a result, changes in trade restrictions and tariffs could impact our ability to meet projected
sales or margins.

COVID-19

To date, COVID-19 has had an adverse impact on our sales, operations,
supply chains, and distribution systems, and also resulted in a one-month shutdown of our factories and in delivery delays in 2020. During
2021, we continued to face unanticipated challenges caused by the continued impact of the global pandemic and emerging variants of the
virus. Certain customers deferred their purchases due to the pandemic as global supply chains throughout the automotive industry experienced
significant disruptions. Due to precautionary measures related to COVID-19 and resulting global economic impacts, we may experience further
reductions in demand for certain of our products.

Basis of Presentation

We currently conduct our business through one operating
segment. Our historical results are reported in accordance with U.S. GAAP and in U.S. dollars.

Components of Results of Operations

Revenue

We derive revenue from the sales of our electric
battery products, including LpTO, LpCO, MpCO and HnCo battery power systems. While we have historically marketed and sold our products
primarily in the PRC, we are also expanding our sales presence internationally. The following table sets forth a breakdown of our revenue
by the major geographic regions in which our customers are located for the periods indicated:

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We have historically derived a portion of our revenue in a given reporting
period from a limited number of key customers, which have varied from period to period. For the fiscal year ended December 31, 2021, one
customer accounted for 11% of our net revenues. In 2020, no customer accounted for over 10% of our net revenues.

Cost of Revenues and Gross Profit

Cost of revenues include direct and indirect materials,
manufacturing overhead (including depreciation, freight and logistics), warranty reserves and expenses, and labor costs and related personnel
expenses, including stock-based compensation and other related expenses that are directly attributable to the manufacturing of products.

Gross profit is equal to revenue less cost of revenues.
Gross profit margin is equal to gross profit divided by revenue.

Operating Expense

Operating expenses consist of selling and marketing,
general and administrative and R&D expenses.

Selling and marketing expenses. Selling
and marketing expenses consist primarily of personnel-related costs associated with our sales and marketing functions, including salaries
and stock-based compensation, and other expenses related to advertising and promotions of our products. We intend to hire additional sales
personnel, initiate additional marketing programs and build additional relationships with our customers. Accordingly, we expect that our
selling and marketing expenses will continue to increase in absolute dollars in the long term as we expand our business.

General and administrative expenses. General
and administrative expenses consist primarily of personnel-related expenses associated with our executive, including stock-based compensation,
legal, finance, human resource and information technology functions, as well as fees for professional services, depreciation and amortization
and insurance expenses. We expect to incur additional costs as we hire personnel and enhance our infrastructure to support the anticipated
growth of our business.

Research and development expenses. Research
and development expenses consist primarily of personnel-related expenses, including stock-based compensation, raw material expenses relating
to materials used for experiments, utility expenses and depreciation expenses attributable to research and development activities. Over
time, we expect our research and development expense to increase in absolute dollars as we continue to make significant investments in
developing new products, applications, functionality and other offerings.

Subsidy Income

Government subsidies represent government grants
received from local government authorities. The amounts of and conditions attached to each subsidy were determined at the sole discretion
of the relevant governmental authorities. Our subsidy income is non-recurring in nature.

Other Income and Expenses

Other income and expenses consist primarily of
the interest expense associated with our debt financing arrangements, interest income earned on our cash balances, gains and losses from
foreign exchange conversion, and gains and losses on disposal of assets.

Income Tax Expense

We are subject to income taxes in the U.S. and
the foreign jurisdictions in which we do business, namely the PRC, Germany and the U.K. These foreign jurisdictions have statutory tax
rates different from those in the U.S. Accordingly, our effective tax rates will vary depending on the relative proportion of foreign
to U.S. income, the absorption of foreign tax credits, changes in the valuation of our deferred tax assets and liabilities and changes
in tax laws. We regularly assess the likelihood of adverse outcomes resulting from the examination of our tax returns by the U.S. Internal
Revenue Service (the “IRS”) and other tax authorities to determine the adequacy of our income tax reserves and expense. Should
actual events or results differ from our current expectations, charges or credits to our income tax expense may become necessary. Any
such adjustments could have a significant impact on our results of operations.

Income tax in the PRC is generally calculated at
25% of the estimated assessable profit of our subsidiaries in the PRC, except that two of our PRC subsidiaries are qualified as “High
and New Tech Enterprises” and thus enjoy a preferential income tax rate of 15%. The federal corporate income tax rate of 21% is
applied for our U.S. entity. Our income tax in the U.K. is calculated at an average tax rate of 19% of the estimated assessable profit
of our subsidiary in the U.K. The German enterprise income tax, which is a combination of corporate income tax and trade tax, is calculated
at 29.1% of the estimated assessable profit of our subsidiary in Germany.

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Results of Operations

This section of this Form 10-K generally discusses 2021 and 2020 items
and year-to-year comparisons between 2021 and 2020. Discussions of 2019 items and year-to-year comparisons between 2020 and 2019 are not
included in this Form 10-K, and can be found in “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” in the Definitive Proxy Statement on Schedule 14A filed on July 2, 2021.

Comparison of the Year Ended December 31, 2020 to the Year Ended
December 31, 2021

The following table sets forth our historical operating
results for the periods indicated:

Revenue

Our revenue increased from approximately $107.5 million for the year
ended December 31, 2020 to approximately $152.0 million for the same period in 2021 primarily driven by an increase in sales volume from
approximately 302.6 MWh for year ended December 31, 2020 to approximately 489.2 MWh for the same period in 2021, which is due to the increase
in the sales of battery cell products to new and existing customers in the Asia & Pacific region.

Cost of Revenue and Gross Profit

Our cost of sales for the year ended December 31, 2021 increased $104.3
million, or 115.4% compared to the same period in 2020. Our gross profit margin decreased from 15.9% for the year ended December 31, 2020
to (28.1)% for the same period in 2021. The increase in cost of sales and the decrease in gross margin was primarily due to (i) increase
in product warranty cost as mentioned below, (ii) increases in material prices since the end of 2020, (iii) disposal of some legacy products
at or below their original costs to produce of $18.3 million, (iv) $4.3 million of share-based compensation expense we began recognizing
based on modified vesting condition after the Business Combination, and (v)  an increase in manufacturing costs due to industry-wide
semiconductor shortages, which resulted in a higher manufacturing cost per unit of $17.3 million.

Our legacy product that was sold during 2017 and
2018 to our PRC-based customers did not meet our high standards and experienced performance issues. Following a rigorous root cause analysis
completed in October 2021, we determined that a component sourced from a third-party supplier was not meeting our performance standards.
It is our expectation that the legacy product will need to be replaced before the expiration of the product warranty in their respective
sales contracts with our customers. We believe this issue is limited to this legacy product which we ceased selling in late 2018, as the
component was not incorporated into any other products. Accordingly, the accrued warranty cost for all products increased to $52.9 million
for the year ended December 31, 2021 compared to $3.5 million for the year ended December 31, 2020.

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Operating Expense

Selling and Marketing

Selling and marketing expenses for the year ended December 31, 2021
increased $7.7 million, or 55.7%, compared to the same period in 2020. The increase in selling and marketing expenses was primarily due
to $6.0 million of the share-based compensation expense we began recognizing based on modified vesting condition after the Business Combination
and others $1.7 million increased due to business expansion.

General and Administrative

General and Administrative expenses for the year ended December 31,
2021 increased $82.8 million, or 439.2%, compared to the same period in 2020. The increase in General and Administrative expenses was
primarily due to (i) $64.9 million of the increased administrative headcount to support our overall growth and share-based compensation
expense we began recognizing based on modified vesting condition after the Business Combination, (ii) $6.3 million of increased professional
service expense after the Business Combination, (iii) 5.2 million of increased exchange loss, (iv) $2.8 million increased loss for bad
debt and asset impairment, and (v) other increases of business expansion.

Research and Development

Research and Development expenses for the year ended December 31, 2021
increased $17.7 million, or 106.7%, compared to the same period in 2020. The increase in Research and Development expenses was primarily
due to (i) $2.6 million of increased costs of materials used for experiments due to more testing
activities; (ii) $1.0 million of increased personnel-related expenses as we increased headcount of our research team as a result
of our efforts to further develop and enhance our products; and (iii) $13.1 million share-based compensation expense we began recognizing
based on modified vesting condition after the Business Combination.

Subsidy Income

Subsidy income
increased from $3.0 million for the year ended December 31, 2020 to $6.1 million in the same period in 2021, primarily due to
a one-time award granted by local governments in the PRC in 2021.

Loss on changes in fair value of convertible notes

For the year
ended December 31, 2021, we incurred a loss of $9.9 million due to changes in fair value
of the convertible notes issued in January and February 2021 and converted to common stock upon the Business Combination.

Gain on change in fair value of warrant liability

For the year
ended December 31, 2021, we recorded gain of $2.5 million due to change in fair value of warrant liability we assumed from
the Business Combination.

Liquidity and Capital Resources

Since inception, we have financed our operations
primarily from capital contributions from equity holders, issuance of convertible notes and bank borrowings. We expect existing cash,
cash equivalents, short-term marketable securities, cash flows from operations and financing activities to continue to be sufficient
to fund our operating activities and cash commitments for investing and financing activities for at least the next 12 months and thereafter
for the foreseeable future.

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As of December 31, 2021,
our principal sources of liquidity were our cash and cash equivalents in the amount of $480.9 million.

The consolidated net cash position as of December
31, 2021 included cash, cash equivalents of $48.3 million, $3.6 million and $0.7 million held by our PRC, German and UK subsidiaries,
respectively, that is not available to fund domestic operations unless funds are repatriated. Should we need to repatriate to the U.S.
part or all of the funds held by our international subsidiaries in the form of a dividend, we would need to accrue and pay withholding
taxes. We do not intend to pay any cash dividends on our common stock in the foreseeable future and intend to retain all of the available
funds and any future earnings for use in the operation and expansion of our business in the PRC, the EU and the U.S.

We continue to assess the effect
of the COVID-19 pandemic and the Russia/Ukraine crisis on our operations. The extent to which the COVID-19 pandemic will impact our business
and operations will depend on future developments that are highly uncertain and cannot be predicted with confidence, such as the continuing
spread of the infection, new and emerging variants of the virus, the duration of the pandemic, and the effectiveness of actions taken
in the U.S. and other countries to contain and treat the disease. The extent to which the Russia/Ukraine crisis will impact our business
and operations will also depend on future developments that are highly uncertain and cannot be predicted with confidence, including restrictive
actions that may be taken by the U.S. and/or other countries, such as sanctions or export controls, and the duration of the conflict.

Financings

As of December 31, 2021, we had bank borrowings
of $13.3 million, the terms of which range from four months to 12 months. The interest rates of our bank borrowings ranged from 3.80%
to 6.00% per annum. As of December 31, 2021, we had convertible bonds of $73.1 million, with interest rates ranging from 0% to 4%. The
convertible bonds are due as follows: $29.2 million in 2023; $29.2 million in 2024; and $14.7 million in 2026. As of December 31, 2021,
we were in compliance with all material terms and covenants of our loan agreements, credit agreements, bonds and notes.

On July 23, 2021, we received $708.4 million from
the completion of the Business Combination, $705.1 million net of transaction costs paid by Microvast, Inc. We used $87.9 million of the
net proceeds from the Business Combination to expand our manufacturing facilities and $23.9 million of the net proceeds was used for working
capital. We plan to spend approximately $446.0 million on continued expansions of our facilities in Huzhou, China and Clarksville, Tennessee.

The exercise price for our outstanding warrants
is $11.50 per share of common stock, and the trading price of our common stock was $7.21 as of March 25, 2022. There is no guarantee
that the warrants will be exercised prior to their expiration, however, we do not expect this to impact our liquidity and we believe we
will be able to meet our working capital requirements for at least the next 12 months and fund our expansion plans with proceeds from
the Business Combination.

Capital expenditures and other contractual
obligations

Our future capital requirements
will depend on many factors, including, but not limited to fund planned production capacity expansion
and the general working capital. We believe the proceeds from the Business Combination will be sufficient to cover our planned
expansions and our general working capital needs. In addition, we may in the future enter into arrangements to acquire or invest in complementary
businesses or technologies. We may need to seek additional equity or debt financing in order to meet these future capital requirements.
If we are unable to raise additional capital when desired, or on terms that are acceptable to us, our business, financial condition and
results of operations could be adversely affected.

Lease Commitments

We
lease certain facilities and equipment under non-cancellable lease agreements that expire at various dates through 2036.  As of December
31, 2021, the value of our obligations under leases was $30.1 million.

Purchase Commitments

We
regularly enter into non-cancelable contractual obligations primarily related to purchases of inventory. As of December 31, 2021,
such purchase commitments, which do not qualify for recognition on our Consolidated Balance Sheets, amount to $21.7 million, of which
$20.6 million is short-term.

Capital Expenditures

Our capital expenditures
amounted to $18.6 million and $87.9 million for the years ended December 31, 2020 and 2021, respectively. Our capital expenditures
in 2020 and 2021 related primarily to the construction of manufacturing facilities under our expansion plan.

In 2021, we started our
capacity expansion plans in Huzhou, China, Berlin, Germany and Clarksville, Tennessee. The project in Germany was completed in 2021, and
the Huzhou, China and Clarksville, Tennessee projects are expected to be completed in 2023. The completion of these projects is expected
to increase our existing production capacity by 4 GWh once operational. We expect the total capital expenditures related to these capacity
expansions to be approximately $446 million, which we plan to finance primarily through the proceeds from the Business Combination,
which we believe will be sufficient to cover all of the disclosed and estimated costs.

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Our planned capital expenditures
are based on management’s current estimates and may be subject to change. There can be no assurance that we will execute our capital
expenditure plans as contemplated at or below-estimated costs, and we may also from time-to-time determine to undertake additional
capital projects and incur additional capital expenditures. As a result, actual capital expenditures in future years may be more or less
than the amounts shown

Cash Flows

The following table provides a summary of our cash
flow data for the periods indicated:

Cash Flows from Operating Activities

During the year ended December 31, 2021, our operating activities used
$45.0 million in cash. This decrease in cash consisted of (1) $21.1 million in cash paid after adjusting our net loss for non-cash and
non-operating items, of which $20.0 million is depreciation of property, plant and equipment, $9.9 million loss on change
in fair value of convertible notes, and $2.5 million gain on change in fair value of warrant; (2) $23.9 million decrease in
cash flows from operating assets and liabilities including $1.8 million cash outflow due to increase of accounts receivable and notes
receivable.

During the year ended December 31,
2020, our operating activities generated $15.6 million in cash. This increase in cash consisted of: (1) $11.4 million in
cash paid after adjusting our net loss for non-cash and non-operating items, of which $16.1 million is depreciation of
property, plant and equipment; and (2) $27.0 million increase in cash flows from operating assets and liabilities including
$10.3 million cash inflow due to collection of accounts receivable and notes receivable.

Cash Flows from Investing Activities

During the year ended December
31, 2021, cash used in investing activities totaled $87.9 million. This cash outflow primarily consisted of capital expenditures related
to purchase of property and equipment in connection with our expansion plans.

During the year ended December 31,
2020, cash used in investing activities totaled $17.7 million. This cash outflow primarily consisted of capital expenditures of $18.6 million
related to purchase of property and equipment in connection with our expansion plan and $4.6 million related to the purchase of short-term investments,
partially offset by proceeds of $5.5 million from maturity of short-term investments.

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Cash Flows from Financing Activities

During the year ended December 31,
2021, cash provided by financing activities totaled $624.9 million. This cash inflow was a result of $38.9 million proceeds from bank
borrowings, $57.5 million proceeds from the issuance of convertible notes to new investors and $222.6 million from the trust account upon
consummation of the Business Combination, net of transaction costs, partially offset by $37.6 million repayment on bank borrowings, a
$139.0 million repurchase of a minority interest in a subsidiary and $482.5 million from PIPE investors upon consummation of the Business
Combination.

During the year ended December 31,
2020, cash used in financing activities totaled $0.5 million. This cash outflow was a result of $17.8 million repayment on bank
borrowings, partially offset by $17.3 million proceeds from bank borrowings.

Critical Accounting Policies and Estimates

Our consolidated financial
statements are prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements requires us to make estimates
and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses, and related disclosures. We evaluate our estimates
and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to
be reasonable under the circumstances. Our actual results could differ from these estimates.

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We believe the following
critical accounting policies involve a higher degree of judgment and complexity than our other accounting policies. Therefore, these are
the policies we believe are the most critical to understanding and evaluating our consolidated financial condition and results of operations.

Product Warranty

We provide product warranties,
which entail the repair or replacement of non-conforming items, in conjunction with sales of products. Estimated costs related to
warranties are recorded in the period in which the related product sales occur. The warranty liability recorded at each balance sheet
date reflects management’s best estimates of its product warranties based on historical information and other currently available
evidence.

Our product warranties
generally range from one to eight years. We establish a reserve for the estimated cost of the product warranty at the time revenue is
recognized. The portion of the warranties we expect to incur within the next 12 months is recorded in accrued expenses and other
current liabilities, while the remainder is recorded in other non-current liabilities on the consolidated balance sheets. Warranty
reserves are recorded as a cost of revenue.

In 2021, as a result of
the increases in the repairing cost and frequency of claims with respect to a legacy product sold in 2017 and 2018, we conducted intensive
experiments and a root cause analysis, which was completed in October 2021. We concluded that a component purchased from a supplier was
not meeting our performance standards. As a result, we expect that the impacted legacy products sold will need to be replaced before the
expiration of warranty term. This reassessment resulted in a change in estimate for additional accrual of $46.5 million for such
legacy product in 2021. As the component was not incorporated into other products, no additional accrual was made to other existing products
sold.

Inventories

Inventories are stated
at the lower of cost or net realizable value. Cost is determined using the weighted average method. Inventory levels are analyzed periodically
and written down to their net realizable value if they have become obsolete, have a cost basis in excess of expected net realizable value
or are in excess of expected demand. We analyze current and future product demand relative to the remaining product life to identify potential
excess inventories. These forecasts of future demand are based upon historical trends and analysis as adjusted for overall market conditions.
Inventory write-downs are measured as the difference between the cost of the inventory and its net realizable value, and charged to inventory
reserves, which is a component of cost of revenue. At the point of the loss recognition, a new, lower cost basis for those inventories
is established, and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established
cost basis. We recorded inventory impairment losses of $4.2 million, $1.3 million and $18.3 million during the years ended December 31,
2019, 2020 and 2021, respectively, as we had to sell certain products that did not qualify for the revised subsidies at lower prices.
We monitor the inventory impairments periodically and, since battery technology continues to advance, we may incur inventory impairment
losses in the future.

Income Taxes

We
utilize the asset and liability method in accounting for income taxes. Deferred tax assets and liabilities reflect the estimated future
tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. Deferred tax expense or benefit is the result of changes in the deferred tax asset and liability.
Valuation allowances are established when necessary to reduce deferred tax assets where it is more likely than not that the deferred tax
assets will not be realized. We make estimates, assumptions and judgments to determine its provision for its income taxes, deferred tax
assets and liabilities, and any valuation allowance recorded against deferred tax assets. We assess the likelihood that our deferred tax
assets will be recovered from future taxable income, and to the extent we believe that recovery is not likely, we established a valuation
allowance.

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We account for uncertain
tax positions by reporting a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken
in a tax return. Tax benefits are recognized from uncertain tax positions when we believe that it is more-likely-than-not that the tax
position will be sustained on examination by the taxing authorities based on the technical merits of the position. We recognize interest
and penalties, if any, related to unrecognized tax benefits in income tax expense.

Stock-Based Compensation

We recognize compensation
expense on a straight-line basis over the service period that awards are expected to vest, based on the estimated fair value of the awards
on the date of the grant. We recognize forfeitures as they occur. Fair value excludes the effect of non-market based vesting conditions.
The fair value of RSUs with service conditions is based on the grant date share price. We estimate the fair value of options utilizing
the Binomial-Lattice Model. The fair value of non-vested shares that vest based on market conditions are estimated using the
Monte Carlo valuation method. These fair value estimates of stock related awards and assumptions inherent therein are estimates and, as
a result, may not be reflective of future results or amounts ultimately realized by recipients of the grants. For these awards with performance
conditions, we recognize compensation expense when the performance goals are achieved, or when it becomes probable that the performance
goals will be achieved. Management performs the probability assessment on a quarterly basis by reviewing external factors, such as macroeconomic
conditions and the analog industry revenue forecasts, and internal factors, such as our business and operational objectives and revenue
forecasts. Changes in the probability assessment of achievement of the performance conditions are accounted for in the period of change
by recording a cumulative catch-up adjustment as if the new estimate had been applied since the service inception date. As a result,
our stock-based compensation expense is subject to volatility and may fluctuate significantly each quarter due to changes in our
probability assessment of achievement of the performance conditions or actual results being different from projections made by management.
Liability-classified awards are remeasured at lower of capped value or fair value as of each report date during settlement.

Emerging Growth Company Status

Section 102(b)(1)
of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until
private companies are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company
can choose not to take advantage of the extended transition period and comply with the requirements that apply to non-emerging growth
companies, and any such election to not take advantage of the extended transition period is irrevocable.

We are an “emerging
growth company” as defined in Section 2(a) of the Securities Act of 1933, as amended (the “Securities Act”) as
our last fiscal year revenue was less than $1.07 billion. We have elected to take advantage of the benefits of the extended transition
period for new or revised financial accounting standards, although we may decide to adopt early such new or revised accounting standards
to the extent permitted by such standards. This may make it difficult or impossible to compare our financial results with the financial
results of another public company that is either not an emerging growth company or is an emerging growth company that has chosen not to
take advantage of the extended transition period exemptions as a result of the potential differences in accounting standards used.

We will remain an emerging
growth company until the earliest of (a) the last day of the fiscal year during which we have total annual gross revenues of at least
$1.07 billion; (b) the last day of our fiscal year following the fifth anniversary of the completion of this offering; (c) the date on
which we have, during the preceding three-year period, issued more than $1.0 billion in non-convertible debt; or (d) the date on which
we are deemed to be a “large accelerated filer” under the Exchange Act, which would occur if the market value of the ADSs
that are held by non-affiliates is at least $700 million as of the last business day of our most recently completed second fiscal quarter.
Once we cease to be an emerging growth company, we will not be entitled to the exemptions provided in the JOBS Act discussed above.