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SIGNIFICANT ACCOUNTING POLICIES

9 Months Ended

Sep. 30, 2024

Basis of presentation and use of estimates

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries. The unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Security and Exchange Commission (the "SEC") and U.S. generally accepted accounting standards (“U.S. GAAP”) for interim financial reporting. Accordingly, certain information and disclosures normally included in the notes to the annual financial statements prepared in accordance with U.S. GAAP have been omitted from these interim financial statements.

The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the period ended December 31, 2023 included in the Company’s Annual Report on Form 10-K filed with the SEC on April 1, 2024, which provides a more complete discussion of the Company’s accounting policies and certain other information. In the opinion of the management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (which include normal recurring adjustments) necessary for a fair statement of financial results for the interim periods presented. The Company believes that the disclosures are adequate to make the information presented not misleading.

The results of operations for the three and nine months ended September 30, 2024 are not necessarily indicative of the results to be expected for any subsequent quarter or for the fiscal year ending December 31, 2024.

The financial information as of December 31, 2023 included on the condensed consolidated balance sheets is derived from the Group’s audited consolidated financial statements for the year ended December 31, 2023.

There have been no significant changes to the significant accounting policies disclosed in Note 2 of the audited consolidated financial statements for the years ended December 31, 2023.

Significant accounting estimates reflected in the Group’s financial statements include allowance for credit losses, write-down of obsolete inventories, impairment of long-lived assets, valuation allowance for deferred tax assets, product warranty, fair value measurement of warrant liability, fair value measurement of convertible loan and share based compensation.

All intercompany transactions and balances have been eliminated upon consolidation.

Going concern

The accompanying unaudited condensed consolidated financial statements of the Group have been prepared on a going concern basis, which assumes that the Group will continue to realize its assets and settle its liabilities in the ordinary course of business.

For the three months ended September 30, 2024 and 2023, the Group generated revenues of $101,388 and $80,116, gross profit of $33,612 and $17,884, net profit of $13,247 and net loss of $26,172, and operating cash outflow of $5,429 and $29,342, respectively. For the nine months ended September 30, 2024 and 2023, the Group reported revenues of $266,414 and $202,042, gross profit of $78,032 and $34,203, net loss of $113,134 (including a $88,039 impairment loss from long-lived assets) and $81,821, and operating cash outflow of $3,287 and $70,350, respectively. As of September 30, 2024, the Group had working capital of $101,683, shareholders' equity of $486,088 (including an accumulated deficit of $1,010,635), and cash and cash equivalents of $63,585. The Group also held outstanding borrowings of $119,574, with $66,177 due within the next 12 months, and other current liabilities of $269,711, which include accounts payable, notes payable, and accrued expenses. Additionally, the Group had $52,262 in purchase commitments primarily related to inventory as of September 30, 2024.

Going concern-continued

The Group has made significant investments to expand its capacity, particularly in its Huzhou, China facility and Clarksville Property. The Huzhou Phase 3.1 expansion is now contributing revenue following its completion in the third quarter of 2023 and the Huzhou Phase 3.2 expansion is in process which requires additional capital expenditure. The Clarksville Property expansion has been paused. Initially intended to produce 53.5Ah cells for the Group's ESS solutions, the Clarksville Property is now being evaluated for a potential shift to lithium iron phosphate (LFP) cell production, which better aligns with the Group’s evolving ESS strategy. The Clarksville Property will require additional financing, and the timing for resuming the project is currently under review.

As of September 30, 2024, the Group had outstanding payables of $31,653 related to the Clarksville Property. The Group is actively working with suppliers. Some of those suppliers have filed liens while others have entered settlement agreements that include payment adjustments and lien releases.

The above factors raise substantial doubt about the Group’s ability to continue as a going concern within the next twelve months from the date of issuance of its unaudited condensed consolidated financial statements.

Management has secured a $29,911 bank loan in the third quarter of 2024, with an additional $9,962 received in October 2024. Further details can be found in Note 8 – Bank Borrowings. Workforce reductions were made in the U.S. during the second and third quarters of 2024, delivering cost savings and enhanced cash flow. Further plans to alleviate the conditions that raise substantial doubt include:

•Operational Improvements: With profitability achieved in the third quarter of 2024, management expects that continued execution of its strategies will generate positive cash flow from operations over the next twelve months.

•Asset Sales: The Group is actively pursuing the sale of non-core U.S. real estate assets, with an expectation of increasing liquidity without affecting core operations.

•Additional Funding Options: Although no additional binding financing agreement has been entered into besides those disclosed in the unaudited condensed consolidated financial statements, the Group is actively engaged in discussions with third parties to explore further funding options.

These plans are not final and are subject to market and other conditions not within the Group’s control. As such, there can be no assurance that the Group will be successful in obtaining sufficient capital.

Accordingly, management has concluded that these plans do not alleviate the substantial doubt about the Group’s ability to continue as a going concern within one year after the date the unaudited condensed consolidated financial statements are issued. Based on the factors above, there is a substantial doubt as to whether the Group will continue as a going concern and therefore whether it will realize its assets and discharge its liabilities in the normal course of business and at the amounts stated in the financial statements. The accompanying unaudited condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or to the amounts and classification of liabilities that might be necessary should the Group not continue as a going concern.

Emerging Growth Company

Pursuant to the JOBS Act, an emerging growth company (the “EGC”) may adopt new or revised accounting standards that may be issued by FASB or the SEC either (i) within the same periods as those otherwise applicable to non-EGCs or (ii) within the same time periods as private companies. The Company intends to take advantage of the exemption for complying with new or revised accounting standards within the same time periods as private companies. Accordingly, the information contained herein may be different than the information provided by other public companies.

The Company also intends to take advantage of some of the reduced regulatory and reporting requirements of EGCs pursuant to the JOBS Act so long as the Company qualifies as an EGC, including, but not limited to, an exemption from the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation, and exemptions from the requirements of holding non-binding advisory votes on executive compensation and golden parachute payments.

Revenue recognition

Nature of Goods and Services

The Group’s revenue consists primarily of sales of lithium-ion batteries. The obligation of the Group is to provide the battery products. Revenue is recognized at the point of time when control of the promised goods or services is transferred to the customer, in an amount that reflects the consideration the Group expects to be entitled to in exchange for the goods or services.

Disaggregation of revenue

For the three and nine months ended September 30, 2024 and 2023, the Group derived revenues from geographic regions as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2024		2023		2024		2023
People’s Republic of China ("PRC")	$	28,716	$	36,289	$	89,190	$	115,023
Other Asia & Pacific countries	10,550		24,611		36,215		46,280
Asia & Pacific	39,266		60,900		125,405		161,303
Europe	59,479		19,034		135,145		38,556
U.S.	2,643		182		5,864		2,183
Total	$	101,388	$	80,116	$	266,414	$	202,042

Contract balances

Contract balances include accounts receivable and advances from customers. Accounts receivable represent cash not received from customers and are recorded when the rights to consideration are unconditional. The allowance for credit losses reflects the best estimate of probable losses inherent to the accounts receivable balance. Contract liabilities, recorded in advance from customers in the consolidated balance sheets, represent payment received in advance or payment received related to a material right provided to a customer to acquire additional goods or services at a discount in a future period. During the three months ended September 30, 2024 and 2023, the Group recognized $883 and $1,191 of revenue previously included in advance from customers as of July 1, 2024 and July 1, 2023, respectively. During the nine months ended September 30, 2024 and 2023, the Group recognized $4,208 and $2,485 of revenue previously included in advance from customers as of January 1, 2024 and January 1, 2023, respectively.

Operating leases

As of September 30, 2024, the Company recorded operating lease right-of-use (ROU) assets of $19,468 and operating lease liabilities of $19,540, including current portion in the amount of $3,214, which was recorded under accrued expenses and other current liabilities on the balance sheet.

The Company determines if an arrangement is a lease or contains a lease at lease inception. Operating leases are required to record in the statement of financial position as right-of-use assets and lease liabilities, initially measured at the present value of the lease payments. The Company has elected the package of practical expedients, which allows the Company not to reassess (1) whether any expired or existing contracts as of the adoption date are or contain a lease, (2) lease classification for any expired or existing leases as of the adoption date and (3) initial direct costs for any expired or existing leases as of the adoption date. The Company also elected the practical expedient not to separate lease and non-lease components of contracts. Lastly, for lease assets other than real estate, such as printing machines and electronic appliances, the Company elected the short-term lease exemption as their lease terms are 12 months or less.

Operating leases - continued

As the rate implicit in the lease is not readily determinable, the Company estimates its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The incremental borrowing rate is estimated in a portfolio approach to approximate the interest rate on a collateralized basis with similar terms and payments in a similar economic environment. Lease expense is recorded on a straight-line basis over the lease term.

Impairment of long-lived assets

In accordance with ASC 360, Property, Plant and Equipment ("ASC 360"), the Company reviews 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 the Company 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.

During the first half year of 2024, the Company decided to pause the construction of the Clarksville Property until additional funding for the remaining capital expenditure is secured. As a result, the Company reassessed the recoverability of the long-lived assets in the U.S. and utilized the residual method to estimate the fair value of the plant under construction located in Tennessee. For other long-lived assets in the U.S., the Company estimated market value or estimated cash flow from disposition of the assets. The Company recorded impairment loss of long-lived assets of $12 and $422 for the three months ended September 30, 2024 and 2023, respectively, in operating expenses. The Company recorded impairment loss of long-lived assets of $88,039 and $473 for the nine months ended September 30, 2024 and 2023, respectively, in operating expenses.

Asset held for sales

Assets to be disposed of by sale are reported at the lower of the carrying value or fair vale less cost to sell when the Company has committed to a sale agreement and would be reported separately as asset held for sales in the unaudited condensed consolidated balance sheets.

Debt Restructuring

A debt restructuring is the modification of debt in which a creditor grants a concession it would not otherwise consider to a debtor that is experiencing financial difficulties. These modifications may include a reduction of an extension of the maturity date, a reduction of the face amount or maturity amount of the debt, or a reduction of accrued interest. During the three months ended September 30, 2024, the company recorded a gain of $7,709 on the payable concession in the unaudited condensed consolidated statements of operations.

Convertible loan with shareholder measured at fair value

The Company has elected the fair value option to account for the convertible loan with shareholder described in Note 15 – Convertible loan with shareholder measured at fair value herein, and records changes in fair value in the unaudited condensed 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. As a result of applying the fair value option, direct costs and fees related to the convertible loan were expensed as incurred. Gains of $2,764 and $1,174 were recognized for the three and nine months ended September 30, 2024. 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.

Warrant

The Company determines the accounting classification of warrants it issues as either liability or equity by first assessing whether the warrants meet liability classification in accordance with ASC 480-10, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity ("ASC 480"), then in accordance with ASC 815-40 ("ASC 815"), Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock. Under ASC 480, warrants are considered liability classified if the warrants are mandatory redeemable, obligate the Company to settle the warrants or the underlying shares by paying cash or other assets, or warrants that must or may require settlement by issuing variable number of shares. If warrants do not meet liability classification under ASC 480, the Company assesses the requirements under ASC 815, which states that contracts that require or may require the issuer to settle the contract for cash are liabilities recorded at fair value, irrespective of the likelihood of the transaction occurring that triggers the net cash settlement feature. If the warrants do not require liability classification under ASC 815, and in order to conclude equity classification, the Company also assesses whether the warrants are indexed to its Common Stock and whether the warrants are classified as equity under ASC 815 or other applicable GAAP. After all relevant assessments, the Company concludes whether the warrants are classified as liability or equity. Liability classified warrants require fair value accounting at issuance and subsequent to initial issuance with all changes in fair value after the issuance date recorded in the unaudited consolidated statements of operations. Equity classified warrants only require fair value accounting at issuance with no changes recognized subsequent to the issuance date. Refer to Notes 11 for information regarding the warrants issued.

Recent accounting pronouncements not yet adopted

In November 2023, the FASB issued ASU 2023-07 "Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures" ("ASU 2023-07"). ASU 2023-07 intends to improve reportable segment disclosure requirements, enhance interim disclosure requirements and provide new segment disclosure requirements for entities with a single reportable segment. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023, and for interim periods with fiscal years beginning after December 15, 2024. ASU 2023-07 is to be adopted retrospectively to all prior periods presented. The Company is currently assessing the impact this guidance will have on the consolidated financial statements and related disclosures.

In December 2023, the FASB issued ASU 2023-09 "Improvements to Income Tax Disclosures" ("ASU 2023-09"). ASU 2023-09 intends to improve the transparency of income tax disclosures. ASU 2023-09 is effective for fiscal years beginning after December 15, 2024 and is to be adopted on a prospective basis with the option to apply retrospectively. The Company is currently assessing the impact of this guidance, however, the Company do not expect a material impact to the consolidated financial statements.