# Microvast Holdings, Inc. (MVST) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Microvast Holdings, Inc.'s 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1760689/000121390022015871/f10k2021_microvasthold.htm
Accession: 0001213900-22-015871
Filing date: 2022-03-29
Report date: 2021-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture.
Confidence: high

Company profile: /company/MVST/
All MD&A years: /company/MVST/mda/
Next year: /company/MVST/mda/fy2022/ (FY 2022)

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:

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

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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:

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

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:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2020","","","2021"],["Amount in thousands"],["Net cash provided by (used in) operating activities","","","15,556","","","","(45,039",")"],["Net cash used in investing activities","","","(17,674",")","","","(87,862",")"],["Net cash (used in) provided by financing activities","","","(507",")","","","624,949"]]
[[/GREPCENT_TABLE]]

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.

75

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.