Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
On February 3, 2022 (the “Closing Date”), SES consummated its previously disclosed business combination (the “Business Combination”). Prior to the closing of the Business Combination, Ivanhoe Capital Acquisition Corp. (“Ivanhoe”), a Cayman Islands exempted company, migrated out of the Cayman Islands and domesticated as a Delaware corporation (the “Domestication”) and changed its name to “SES AI Corporation.” On the Closing Date, SES AI Corporation and Wormhole Amalgamation Sub Pte. Ltd., a Singapore private company limited by shares and a direct, wholly-owned subsidiary of Ivanhoe (“Amalgamation Sub”), consummated the Business Combination, which was accounted for as a reverse recapitalization. Under this method of accounting, SES AI Corporation was treated as the “acquired” company for financial reporting purposes. Except as otherwise provided herein, our financial statement presentation includes (i) the historical operating results of Old SES prior to the Business Combination; (ii) the combined results of SES and Old SES following the Closing; (iii) the assets and liabilities of Old SES at their historical cost; and (iv) SES’s equity structure for all periods presented. See “Note 3 – Business Combination” set forth in Part II, Item 8 of this Annual Report on Form 10-K, for additional information.
The following discussion and analysis provides information which our management believes is relevant to an assessment and understanding of our consolidated results of operations and financial condition. The following discussion and analysis should be read in conjunction with our audited consolidated financial statements as of and for the years ended December 31, 2023 and 2022 and the accompanying notes included in this Annual Report on Form 10-K. The following discussion may contain forward-looking statements that reflect our plans, estimates and beliefs, which are subject to risks, uncertainties and assumptions. These forward-looking statements within the meaning of the federal securities law are based on our current expectations and beliefs concerning future developments and their potential effects on us. These forward-looking statements are not statements of historical fact and may include statements regarding possible or assumed future results of operations. There can be no assurance that future developments affecting us will be those that we have anticipated. Our actual results and the timing of events may differ materially from those expressed or implied as a result of various factors, including those set forth in the sections titled “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements.” Unless the context otherwise requires, references in this section to “the Company,” “we,” “us” and “our” refer to the business and operations of SES Holdings Pte. Ltd. (“Old SES”) and its consolidated subsidiaries prior to the Business Combination and to SES AI Corporation and its consolidated subsidiaries following the Closing. References in this section to our future plans that indicate the timing of when we expect such plans to be completed by a certain year mean at any point during that year.
Overview
We are a pre-commercialization stage company engaged in the development and production of high-performance, Lithium-Metal (“Li-Metal”) rechargeable battery technologies for electric vehicles (“EVs”), Urban Air Mobility (“UAM”), which encompasses electric vehicle take-off and landing (“eVTOL”) technology, and other applications. Our differentiated battery technology has been designed to combine the high energy density of Li-Metal with the large-scale manufacturability of conventional Lithium-ion (“Li-ion”) batteries and will help to promote the transition from the global dependence on fossil fuel-based automotive vehicles to clean and efficient EVs and help enable an era of electric transportation in the air.
Our mission is to facilitate the widespread adoption of sustainable electric transportation, both on land and in air, by creating best-in-class, high energy density Li-Metal batteries centered around long-range performance and safety. To assist in achieving this mission, we have partnered with leading global original equipment manufacturers (“OEMs”), General Motors (“GM”), Hyundai Motor Company (“Hyundai”), and Honda Motor Company, Ltd. (“Honda”), among other strategic partners, under joint development agreements (“JDAs”) to jointly develop and produce our Li-Metal battery cells and technology. We have transitioned from the development and production of A-Sample batteries to B-Sample batteries with specifications required by OEMs for their EVs. This transition began when we signed a B-Sample agreement for Li-Metal development of EVs. A-Sample batteries are functional prototypes developed for OEMs based on their technical specifications. These are in contrast with B-Sample batteries, which are A-sample batteries manufactured under much higher throughput and tested in actual vehicles, and C-Sample batteries, which would be fully functional, mature samples for mass production and tested for full drivability in actual vehicles.
We are also conducting research and development activities to further improve the performance, quality and cost of our battery technology by focusing on the following key areas, all of which we expect to help us achieve our commercialization goal, at our facilities in Woburn, Massachusetts in the United States, Shanghai, China, and Chungju, South Korea. These areas include:
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● Scale-up : Our design is further being customized with and validated by several OEMs. Based on our collaborations with OEMs, we believe that a roughly 100 Ah cell-size manufactured at GWh scale (five to seven cells-per-minute) is needed to achieve commercialization in EVs and UAMs at a large, global scale. We are developing processes and upgrading equipment to scale up the manufacturing of our current cell design from three to nine Ah capacity to 50 Ah and 100 Ah.
● Module and Pack Design : Li-Metal cells must be integrated into modules and packs as part of their integration into vehicles. Our active development efforts are focused on the integration of our Li-Metal cells in modules to enable our Li-Metal cells to perform as intended once they are integrated into modules and vehicles.
● Artificial Intelligence (“AI”) Software and Battery Management Systems (“BMS”) : Software is critical to ongoing monitoring of battery health and safety. We continue to develop AI algorithms to diagnose battery cell-related health issues, develop control algorithms and charging methods to enhance cycle life and safety, and port such software on to a BMS that could be integrated into a battery pack.
● Advanced Materials and Coatings : We continue to research and develop advanced electrolyte and anodes to further improve cycle life and safety. In addition, we continue to develop novel methods of laminating or depositing lithium metal onto current collector that can be deployed at commercial GWh scale.
● Cathode Materials and Design : We develop our Li-Metal cells for a variety of different cathode materials, cathode design and cathode processing methods that can provide ultra-high energy density and/or significant cost-reduction.
● Li-Metal Recycling : Along with other battery components that are already being recycled today, Li-Metal foil will also need to be recycled in the future. We continue to explore methods of recycling that are productive and cost-effective.
We continue to make improvements to our two A-sample production lines, one in China and one in South Korea, which are producing large 50 Ah and 100 Ah Li-Metal cells. We expect to convert our third EV A-Sample production line dedicated for making cells for UAM applications. In addition, we expect to launch our fourth and fifth production lines in 2024, which will be dedicated to B-sample EV cells. Furthermore, in June 2023, we entered into a new lease for a facility near our Woburn facility where we have built an electrolyte foundry, which we started using in January 2024. This facility will focus on novel electrolyte molecule discovery and synthetic pathway development.
Outlook
As the joint development of Li-Metal batteries with our OEM partners continues to progress, we transitioned from A-sample to B-sample battery development in the last quarter of 2023. We expect that this will lead to an increase in our headcount and footprint of our research and pre-production pilot facilities as we expand our existing facilities and enter into new facilities.
After B-Sample, we plan to transition to C-Sample in 2026, which we then expect to enable us to commence commercial production of our technology in 2027. We expect this transition to commercial production to lead to future research facilities and, eventually, commercial production manufacturing facilities in the United States, which will significantly increase our materials consumption and the rate of cash utilization over time.
Finally, we expect to explore opportunities for partial vertical integration, both upstream and downstream, to ensure scalability of our battery cells and battery technology. Upstream, we intend to explore integrating vendors of key materials of our cells and providers of key equipment and engineering capabilities, such as cell assembly, anode processing, chemical processing and safety testing. Downstream, we plan to explore integrating providers of key engineering capabilities, such as battery state-of-health monitoring software, charging optimization software, battery module development and recycling.
Results of Operations
The discussion of our results of operations for the year ended December 31, 2021 can be found in “ Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations ” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 filed with the Securities and Exchange Commission on March 16, 2023, which is incorporated herein by reference.
Factors Affecting Operating Results
We are an early-stage growth company in the pre-commercialization stage of development and conduct our business through one operating segment. We have not generated any revenue from sales to customers to date, have spent $53.9 million, $42.2 million and $31.5 million on
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research and development activities, which is prior to credits received by our OEM partners under the JDAs, and have incurred net losses of $53.4 million, $51.0 million, and $31.3 million for the years ended December 31, 2023, 2022 and 2021, respectively, and had an accumulated deficit of $198.7 million and $145.3 million from our inception through December 31, 2023 and 2022, respectively. Our historical results may not be indicative of our future results for reasons that may be difficult to anticipate and our ability to generate revenue in the future that is sufficient enough to achieve profitability will depend largely on the successful development of our products. Accordingly, the drivers of our future financial results, as well as the components of such results, may not be comparable to our historical results of operations.
The following table sets forth our operating results for the periods indicated:
Operating Expenses
Year Ended December 31,
$
%
(in thousands)
2023
2022
Change
Change
Research and development
$
30,675
$
27,967
$
2,708
9.7
%
General and administrative
47,483
51,606
(4,123)
(8.0)
%
Total operating expenses
$
78,158
$
79,573
$
(1,415)
(1.8)
%
Research and Development
Research and development expenses consist primarily of costs incurred for salaries and personnel-related expenses, including stock-based compensation expense, for scientists, experienced engineers and technicians, expenses for materials and supplies used in product research and development, process engineering efforts and testing, as well as payments to consultants, patent related legal costs, depreciation, and allocated facilities and information technology costs.
Research and development expenses for the year ended December 31, 2023 increased $2.7 million, or 9.7%, to $30.7 million, compared with $28.0 million for the year ended December 31, 2022. The increase primarily resulted from a $9.1 million increase in personnel costs mainly attributable to our growth in headcount to support our operations. Further, there was a $5.1 million increase in facility costs due to rent, maintenance, utilities and depreciation expenses, a $3.3 million increase in expenses for lab consumables and material supplies to support activity in our research and pre-production facilities, a $1.1 million increase in professional fees and consulting costs, and a $1.5 million increase in other lab related services. These increases were partly offset by a $2.8 million decrease of stock-based compensation expense that primarily related to the completion of the derived service period and the accounting for forfeited awards for the earn-out shares during 2023 , a $2.5 million decrease in computer and software development costs due to a change in project specifications and timelines , a $1.4 million decrease in JDA pass through costs, and a $10.7 million increase in credits to research and development expense from billings to our JDA partners . We expect research and development expenses to significantly increase in 2024 compared with 2023 as we attempt to develop a battery cell with acceptable performance, yields and costs due to hiring, materials, engineering, and technical staff for product development, building prototypes and testing of battery cells.
General and Administrative
General and administrative expenses consist primarily of costs incurred for salaries and personnel-related expenses, including stock-based compensation expense, for our finance, legal and human resource functions, expenses for director and officer insurance, outside contractor and professional service fees, audit and compliance expenses, legal, accounting and other advisory services, as well as allocated facilities and information technology costs including depreciation. Upon commencement of commercial operations, we also expect to incur customer and sales support and advertising costs.
General and administrative expenses for the year ended December 31, 2023 decreased $4.1 million, or 8.0%, $47.5 million, compared with $51.6 million for the year ended December 31, 2022. This decrease primarily resulted from a $3.7 million decrease in insurance expense due to lower premiums incurred to cover potential liabilities under our indemnification obligations to our directors and certain officers of the Company compared to the prior year period, a $3.5 million decrease in transaction costs incurred in the prior year as a result of the Business Combination completed in February 2022 with no comparable costs in the current year period, and a $1.9 million decrease in marketing and public relations expenses due to a decrease in promotional events compared to the prior year period . These decreases were partly offset by a $3.0 million increase in personnel costs mainly attributable to our growth in headcount to support our operations as a public company, $0.7 million increase of stock-based compensation expense that primarily relates to our annual grant of RSUs and PSUs issued in April 2023, and a $1.3 million increase in professional fees related primarily to increased accounting and audit related expenses, legal fees to support our operations as a public company, and recruiting and consulting services .
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Non-Operating Items
Interest Income
Interest income primarily consists of interest earned on our cash and cash equivalents, which are primarily invested in money market funds, and short-term investments in marketable securities, which are invested in U.S. treasury securities, and accretion income from the marketable securities.
During the year ended December 31, 2023, we had interest income of $16.7 million compared with $6.2 million for the year ended December 31, 2022. This $10.5 million increase was primarily due to an increased investment in marketable securities and higher interest rates during 2023 when compared with 2022.
Change of Fair Value of Sponsor Earn-Out Liabilities
During the year ended December 31, 2023, we incurred a $6.8 million gain compared with a $25.4 million gain for the year ended December 31, 2022 associated with the change in fair value of the Sponsor Earn-Out liabilities. This $18.6 million decrease in gain on the change in fair value of the Sponsor Earn-Out liabilities is tied to SES’s stock price. See “Note 11 – Sponsor Earn-Out Liabilities” to the consolidated financial statements for additional information.
Miscellaneous Income (Expense), Net
During the year ended December 31, 2023, we had miscellaneous income of $0.4 million, compared with miscellaneous expense of $1.8 million for the year ended December 31, 2022. This $2.2 million decrease in miscellaneous expense was primarily the result of the accounting for certain postemployment benefits recorded in the prior year, partially offset by unrealized and realized foreign currency loss primarily due to the strengthening of the Chinese renminbi and South Korean won compared with the U.S. dollar.
Benefit (Provision) from Income Taxes
Benefit from income tax was $0.9 million on pre-tax loss of $54.3 million for the year ended December 31, 2023 compared with income tax expense of $1.3 million on pre-tax loss of $49.7 million for the year ended December 31, 2022. Our effective tax rate was 1.6% and (2.5)% for the years ended December 31, 2023 and 2022, respectively. The difference between our effective tax rate and the U.S. federal statutory rate of 21% was primarily driven by deferred tax benefits and release of valuation allowances from foreign jurisdictions. See “Note 18 – Income Taxes” to the consolidated financial statements for additional information on our income tax expense.
Liquidity and Capital Resources
On February 3, 2022, as a result of the aforementioned Business Combination and PIPE Financing, we raised $282.9 million in net proceeds. Prior to that, since our inception we raised approximately $269.9 million of funding through the sales of our redeemable convertible preferred stock. As of December 31, 2023, we had total cash and cash equivalents of $85.7 million, short-term investments in marketable securities of $246.8 million, and an accumulated deficit of $198.7 million. As an early-stage growth company in the pre-commercialization stage of development, the net operating losses we have incurred since inception are consistent with our strategy and budget.
As a result of the capital-intensive nature of our business, we expect to sustain substantial operating expenses, without generating sufficient revenues to cover expenditures, for a number of years. To date, we have funded our operations through a combination of proceeds from the Business Combination and PIPE Financing and funding received through the sales of our redeemable convertible preferred stock. These funds are expected to finance our principal sources of liquidity and ongoing costs, such as research and development relating to our Li-Metal batteries and the construction of additional manufacturing facilities. In the future, if we are not able to fund our operations from cash flows generated from anticipated product sales, we expect that we will need to raise additional funds through a variety of possible methods, including, but not limited to, entry into joint ventures or other strategic arrangements, issuance of equity, equity-related or debt securities or through obtaining credit from financial institutions, as well as anticipated future revenue from product sales.
We believe that our cash on hand and marketable securities will be sufficient to meet our working capital and capital expenditure requirements for a period of at least 12 months from the date of this Report, and also sufficient to fund us to commercialization. However, additional funding may be required for a variety of reasons, including opportunities to build an integrated supply chain in the United States and delays in expected development of our Li-Metal battery cells. Our ability to successfully develop our products, commence commercial operations and expand our business will depend on many factors, including our working capital needs, the availability of equity and/or debt financing and, over time, our ability to generate positive cash flows from operations.
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Summary of Cash Flows
The following table provides a summary of our cash flow data for the periods indicated:
Year Ended December 31,
(in thousands)
2023
2022
Cash (used in) provided by:
Operating activities
$
(56,412)
$
(46,500)
Investing activities
32,719
(296,009)
Financing activities
3,275
289,927
Effect of exchange rate changes on cash
(552)
(526)
Net (decrease) increase in cash, cash equivalents and restricted cash
$
(20,970)
$
(53,108)
Operating Activities
Our cash flows used in operating activities to date have been primarily comprised of payroll, consumables and supplies related to research and development, expenditures and reimbursements related to our JDAs, and facilities expense and professional services for general and administrative activities. As we continue to ramp up hiring for research and development headcount to accelerate our engineering efforts, we expect our cash used in operating activities to increase significantly before we start to generate any material cash inflows from our operations.
Net cash used in operating activities of $56.4 million for the year ended December 31, 2023 was primarily attributable to net loss of $53.4 million, as adjusted for non-cash operating items such as stock-based compensation expense of $20.6 million, accretion income from available-for-sale short-term investments of $11.1 million, a gain on change in fair value of Sponsor Earn-Out liabilities of $6.8 million, and depreciation and amortization expense of $5.5 million. These non-cash operating items were combined with a $11.1 million working capital outflow. The working capital outflow was driven primarily by a $8.2 million increase in prepaids and other assets, a $1.5 million increase in receivable from related party, a $1.1 million increase in deferred tax assets, a $0.1 million decrease in accrued expenses and a $0.2 million increase in inventories, partially offset by a $0.1 million increase in accounts payable. The increase in prepaids and other assets was primarily due to insurance costs to cover potential liabilities under our indemnification obligations to our directors and certain officers, license fees for software, advance payments for research agreements, and VAT taxes. The increase in receivable from related party was driven by activity from a JDA. The decrease in accrued expenses and other liabilities was primarily due to adjustments for fixed assets in accruals at period end, accrued income taxes payable, payroll related accruals and the accounting of certain postemployment benefits. The increase in inventories was driven by current purchases with limited consumption of materials. The increase in accounts payable was primarily due to an increase in accounts payable related to the purchase of property and equipment for the South Korea and Shanghai facilities offset by a decrease in vendor payables.
Net cash used in operating activities of $46.5 million for the year ended December 31, 2022 was primarily attributable to net loss of $51.0 million, as adjusted for a gain on change in fair value of Sponsor Earn-Out liabilities of $25.4 million, stock-based compensation expense of $22.8 million, depreciation and amortization expense of $2.6 million and accretion income from available-for-sale short-term investments of $2.4 million, partially offset by a $6.4 million working capital inflow. The working capital inflow was driven by a $6.8 million increase in accrued expenses and other liabilities and a $5.5 million decrease in receivable from related party, partially offset by a $4.0 million decrease in accounts payable and a $1.6 million increase in prepaids and other assets. The increase in accrued expenses and other liabilities was primarily due to advanced payments received under the JDAs, accrued income taxes payable, payroll related accruals and the accounting of certain postemployment benefits. The decrease in receivable from related party was driven by activity from a JDA. The decrease in accounts payable was primarily due to the payment of transaction costs related to the Business Combination and PIPE Financing partially offset by an increase in accounts payable related to the purchase of property and equipment for the South Korea facility. The increase in prepaids and other assets was primarily due to insurance costs to cover potential liabilities under our indemnification obligations to our directors and certain officers.
Investing Activities
Net cash provided by investing activities was $32.7 million for the year ended December 31, 2023, compared with net cash used in investing activities of $296.0 million for the year ended December 31, 2022. Investing activities include purchases of investments, maturities of investments, and purchases of property, plant, and equipment. The change in net investments activities, combining purchases and maturities, as well as the change in capital spending are discussed below.
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Purchases and Maturities of Investments – Net purchases of short-term investments were $48.5 million for the year ended December 31, 2023, compared with net proceeds from maturities of short-term investments of $281.4 million for the year ended December 31, 2022. The $232.9 million decrease in net purchases was driven by the nature and time to maturity for the treasury securities included in our portfolio in the current year.
Capital Spending – Capital expenditures were $15.8 million and $14.7 million for the years ended December 31, 2023 and 2022, respectively. These expenditures primarily related to purchases of lab machinery and equipment, lab tools and instruments and leasehold improvements to our facilities in the United States, Shanghai and South Korea. We expect capital expenditures to significantly increase in 2024 compared with 2023 as we continue to invest in the build out of our manufacturing pre-production facilities and expand into new facilities.
Financing Activities
Net cash provided by financing activities of $3.3 million for the year ended December 31, 2023 was primarily attributable to proceeds received from a government grant and proceeds from the exercise of stock options.
Net cash provided by financing activities of $289.9 million for the year ended December 31, 2022 related to proceeds received from the Business Combination and PIPE Financing, net of transaction costs, and from a government grant.
Contractual Obligations and Commitments
The following table summarizes our material contractual obligations for cash expenditures as of December 31, 2023, and the periods in which these obligations are due:
Short Term
Long Term
Total
Purchase obligations (1)
$
55,289
$
1,915
$
57,204
Operating lease obligations (2)
3,574
13,490
17,064
Total
$
58,863
$
15,405
$
74,268
(1) Purchase obligations include commitments for the purchase of lab supplies and equipment as well as committed spend related to a JDA. These commitments are derived from purchase orders, supplier contracts and open orders based on projected demand information.
(2) Operating lease obligations represent the fixed lease payments for the noncancelable lease term, fixed lease payments for optional renewal periods where the Company is reasonably certain the renewal option will be exercised, variable lease payments that depend on an underlying index or rate in effect at lease commencement, and future minimal lease payments for executed but not yet commenced lease agreements.
Off-Balance Sheet Arrangements
As of December 31, 2023, we had a letter of credit issued by a financial institution totaling $0.6 million. The letter of credit relates to deposits the Company is required to maintain under one of its operating leases agreements. We have restricted cash that serves as collateral for this outstanding letter of credit that is included in other assets on our consolidated balance sheet. No amounts have been drawn under the letter of credit.
Recent Accounting Pronouncements
See “Note 2 – Summary of Significant Accounting Policies” of our accompanying consolidated financial statements included in this Annual Report on Form 10-K for more information about recent accounting pronouncements, the timing of their adoption, and their potential impact on our financial condition, results of operations and cash flows.
Critical Accounting Estimates and Judgments
Our consolidated financial statements have been prepared in accordance with U.S. GAAP which requires management to use judgment in making estimates and assumptions that affect the reported amounts of assets, liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements, as well as the reported expenses incurred during the reporting periods.
We consider an accounting estimate or assumption to be critical when (1) the estimate or assumption is complex in nature or requires a high degree of judgment and (2) the use of different judgments, estimates and assumptions could have a material impact on the financial statements. Our significant accounting policies are described in “Note 2 – Summary of Significant Accounting Policies” of our
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accompanying consolidated financial statements included in this Annual Report on Form 10-K. We consider the following to be our critical accounting estimates.
Description
Judgments and Uncertainties
Effect if Results Differ From Assumptions
Stock-Based Compensation
We record stock-based compensation expense according to the provisions of ASC Topic 718 – Stock Compensation. ASC Topic 718 requires all share-based awards to employees, including grants of Restricted Stock Units (RSUs), Performance Stock Units (PSUs), Restricted Stock Awards (RSAs), and employee stock options, to be recognized in the financial statements based on their fair values.
Prior to the Business Combination, the RSAs and stock option grant date fair value of Old SES common stock was historically determined by its board of directors with the assistance of management and an independent valuation.
Post Business Combination, as our common stock is publicly traded, the fair value of RSU grants is based on the closing market price on the date grants are made . The fair value of PSU grants is determined through an independent valuation of the likelihood of the performance metrics being met within the terms of the award.
We determine the appropriate fair value model (Black-Scholes model for Options and RSAs, Monte Carlo simulation for PSUs) to be used for valuing share-based issuances and the amortization method for recording compensation cost, which can be impacted by the following assumptions:
●
expected term
●
expected volatility
●
expected dividend yield
●
risk-free interest rate
If we were to change any of these judgments or estimates, it could cause a material increase or decrease in the amount of stock-based compensation expense reported.
Earn-Out Restricted Shares
The Earn-Out Restricted Shares are accounted for as a single tranche equity award issued to employees subject to time and share price vesting hurdle. These Earn-Out Restricted Shares have a share price vesting hurdle and are also subject to forfeiture if a recipient’s service terminates prior to the vesting. Pursuant to ASC 718 – Stock Compensation, we recognize stock-based compensation based on the fair value determined as of Closing with the assistance of management and an independent valuation.
We determine the appropriate fair value model (Monte Carlo simulation) to be used for valuing share-based issuances and the amortization method for recording compensation cost, which can be impacted by the following assumptions:
●
expected term
●
expected volatility
●
expected dividend yield
●
risk-free interest rate
●
probability of change of control
If we were to change any of these judgments or estimates, it could cause a material increase or decrease in the amount
of stock-based compensation expense reported.
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Description
Judgments and Uncertainties
Effect if Results Differ From Assumptions
Sponsor Earn-Out Liabilities
Certain Sponsor Earn-Out Shares are accounted for as a derivative liability measured at fair value, with changes in fair value recorded in the consolidated statement of operations and comprehensive loss at each reporting period, because the earn-out events that determine the number of Sponsor Earn-Out Shares to be earned back by the Sponsor include events that are not solely indexed to the common stock of the Company.
The fair value of our common stock, which is publicly traded, is used in determining the fair value of the derivative liability at each valuation date with the assistance of management and an independent valuation.
We determine the appropriate fair value model (Monte Carlo simulation) to be used for valuing the derivative liability to record the change in fair value in our consolidated statement of operations and comprehensive loss, which may be impacted by the following assumptions:
●
expected volatility
●
risk free rate
●
expected term
●
probability of change of control
If we were to change any of these judgments or estimates, it could cause a material increase or decrease in the amount of earn out liability reported.