Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the consolidated financial statements and related notes thereto included elsewhere in this Report. The following discussion contains forward-looking statements that reflect future plans, estimates, beliefs, and expected performance. For additional discussion, see “Special Note Regarding Forward-Looking Statements” above. The forward-looking statements are dependent upon events, risks, and uncertainties that may be outside of our control. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed elsewhere in this Report, particularly in “Risk Factors.” We do not undertake, and expressly disclaim, any obligation to publicly update any forward-looking statements, whether as a result of new information, new developments or otherwise, except to the extent that such disclosure is required by applicable law.
Overview
Solid Power is developing all-solid-state battery cell technology that replaces the liquid or gel polymer electrolyte used in conventional lithium-ion battery cells with a sulfide-based solid electrolyte. Our sole focus is on the development and commercialization of all-solid-state battery cells and solid electrolyte materials, which we are currently developing for the fast-growing battery-powered electric vehicle market.
Our All-Solid-State Platform is designed to meet the performance and cost demands from both consumers and automotive OEMs and outperform the best performing liquid or gel electrolyte-based lithium-ion technologies of today and tomorrow. We are developing our all-solid-state battery cell technology with the goal to improve, among other things, driving range, battery life, safety, and cost.
We are currently producing 0.2, 2, and 20 Ah Silicon EV Cells using established manufacturing processes on our pilot production line. We have partnered with industry leaders, such as Ford, BMW, and SK Innovation, to further refine and validate our all-solid-state cell designs and the sulfide-based solid electrolyte we manufacture at our headquarters in Louisville, Colorado.
Our business model – licensing our all-solid-state cell designs to top tier cell manufacturers and selling our electrolyte for solid-state cell development – allows for multiple revenue streams and distinguishes us from our competition. By not needing to construct capital intensive gigafactories, we believe we can be “capital light” compared to other development-stage battery companies that plan to produce their battery designs in-house. Please see “Business” above for a more thorough discussion of our business.
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The Business Combination
The business combination was accounted for as a reverse recapitalization, in accordance with GAAP. Under this method of accounting, DCRC was treated as the “acquired” company for financial reporting purposes. Accordingly, the business combination was treated as the equivalent of Legacy Solid Power issuing stock for the net assets of DCRC, accompanied by a recapitalization, whereby no goodwill or other intangible assets was recorded. Operations prior to the business combination are those of Legacy Solid Power. While DCRC was the legal acquirer, because Legacy Solid Power was deemed the accounting acquirer, the historical financial statements of Legacy Solid Power became the historical financial statements of the combined company upon the consummation of the business combination.
As a result of the business combination, we became a Nasdaq-listed company, which will require that we continue to hire additional personnel and implement procedures and processes to address public company regulatory requirements and customary practices. We expect to incur additional annual expenses as a public company for, among other things, directors’ and officers’ liability insurance, director fees, and additional internal and external accounting, legal, and administrative resources, including increased audit, compliance, and legal fees.
Our results of operations and statements of assets and liabilities may not be comparable between periods as a result of the business combination.
Key Factors Affecting Operating Results
We are a research and development-stage company, with the goal to reach commercialization of our all-solid-state battery cells and sulfide-based electrolyte by 2028. We believe that our performance and future success depend on several factors that present significant opportunities for us but also pose significant risks and challenges, including those discussed in “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements,” appearing in this Report, which are incorporated by reference.
Specifically, the success of our business is dependent upon our ability to successfully develop and commercialize our products, which will require significant capital and subject us to regulatory oversight. Prior to reaching commercialization, we must test and validate our products to ensure they meet the performance and safety requirements of our customers. We also will have to negotiate licensing and supply contracts with our customers on terms and conditions that are mutually acceptable. We also will need to scale production of our sulfide-based solid electrolyte material to satisfy anticipated demand. All of these factors will take time and affect our operating results, and, since many are difficult to quantify, our actual operating results may be different than we currently anticipate.
In addition to meeting our development goals on the expected timeline, future growth and demand for our products is highly dependent upon consumers adopting electric vehicles. The market for new energy vehicles is still rapidly evolving, characterized by rapidly changing technologies, competitive pricing and factors, evolving government regulation and industry standards, and changing consumer demands and behaviors. For more information, please see “Business” above.
As a development-stage company, we have not yet generated significant revenues through production of our electrolyte material or all-solid-state battery cell designs. Our revenue generated to date has primarily come from research and development performance on government contracts. We anticipate deploying substantial capital to expand our sulfide-based electrolyte production, to install our EV Line, and in connection with research and development programs. These expenditures are needed to further development of our products and overall business. We also expect to incur significantly more administrative expenses as a publicly traded company than we did previously. For additional information, see “Liquidity and Capital Resources,” and “Results of Operations.”
COVID-19
The COVID-19 pandemic has disrupted supply chains and affected production and sales across a range of industries. The long-term extent of the impact of COVID-19 on our operational and financial performance will depend on certain developments, including the duration and spread of the virus, mutations in the virus, vaccine distribution and uptake and the impact on our customers, employees, and vendors. The ultimate outcome of these matters is uncertain and, accordingly, the impact on our financial condition or results of operations is also uncertain. While the COVID-19 pandemic has presented challenges to our business, including having to
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devote additional time to managing our supply chain, having personnel out sick, implementing social distancing measures, and requiring certain employees to work from home in order to reduce office density, to date, we have not materially altered any terms with our contractors, suppliers, customers, other business partners or financing sources as a result of the COVID-19 pandemic.
Basis of Presentation
We currently conduct our business through one operating segment. As a research and development company with no commercial operations, our activities to date have been limited and were conducted primarily in the United States. Our historical results are reported under GAAP and in U.S. dollars.
Results of Operations
Comparison of the Year Ended December 31, 2021 to the Year Ended December 31, 2020
The following table sets forth our historical operating results for the periods indicated:
Year Ended December 31,
($ in thousands)
2021
2020
Change
%
Revenue
$
2,712
$
2,103
$
609
29
%
Operating Expenses
Direct costs
3,073
1,670
1,403
84
%
Research and development
17,102
9,594
7,508
78
%
Marketing and sales
3,428
1,205
2,223
184
%
General and administrative
5,655
1,227
4,428
361
%
Total operating expenses
29,258
13,696
15,562
114
%
Operating Loss
(26,546)
(11,593)
(14,953)
(129)
%
Nonoperating Income (Expense)
Interest income
56
28
28
NM
Change in fair value of warrant liabilities
51,233
—
51,233
Interest expense
(394)
(361)
(33)
NM
Other expense
(3,602)
—
(3,602)
Loss from change in fair value of debt
—
(437)
437
NM
Loss from change in fair value of embedded derivative liability
(2,680)
(2,817)
137
NM
Gain on loan extinguishment
—
923
(923)
NM
Total nonoperating income (loss)
44,613
(2,664)
47,277
1775
%
Pretax Income (Loss)
18,067
(14,257)
32,324
227
%
Income tax (benefit) expense
(25)
118
(143)
NM
Net Income (Loss)
$
18,092
$
(14,375)
32,467
226
%
Premium paid on repurchase of redeemable convertible preferred stock
(5,436)
—
(5,436)
Net Income (Loss) attributable to Common Stockholders
12,656
(14,375)
27,031
188
%
NM = Not meaningful
The key factors driving our 2021 increase in operating loss were as follows:
·
Revenue – our overall revenue increased, however we saw an increase in revenue from governmental contracts and corresponding decrease to commercial revenues driven by the timing of program execution.
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·
Direct costs – our direct costs increased as a result of an increase in costs associated with government programs and a corresponding decrease in costs associated with commercial programs.
·
Research and development – our research and development costs increased primarily as a result of increased labor costs and material consumption as we expanded the development efforts of our all-solid-state battery cells and electrolyte material. We expect our development costs to increase significantly as we continue to accelerate both the pace and scope of our development efforts.
·
Marketing and sales – our marketing and sales costs increased as a result of increased labor costs, stock compensation expense, and an expansion of our sales and marketing efforts.
·
General and administrative – our general and administrative costs increased primarily as a result of professional service fees and labor costs as a result of our public company status. We expect our general and administrative costs to increase as a result of increased public company costs and requirements.
·
Nonoperating income – our nonoperating income increased as a result of the gain on fair value adjustment of warrant liabilities, loss from change in fair value of embedded derivative liability, and other expense related to the buyout and termination of a manufacturing rights agreement.
Liquidity and Capital Resources
Sources of Liquidity
Our sources of cash are primarily derived from the sale of equity, including the Series B Financing and the business combination, with a small portion coming from performance on government contracts and commercial revenues. As discussed further below, we expect our sources of liquidity and cash flows will be sufficient to fund ongoing operations, research and development efforts, and to meet our anticipated capital expenditure needs.
Short-Term Liquidity Requirements
As of the date of this Report, we have yet to generate material revenue from our principal business activities. As of December 31, 2021, we had $513 million of cash and cash equivalents, $76 million of marketable securities, and our current liabilities were $8.4 million, primarily comprised of accounts payable, accrued compensation, and other accrued liabilities.
We anticipate that our most significant capital expenditures in 2022 will relate to construction of our second production facility in Thornton, Colorado. The purpose of this facility is to scale production of our sulfide-based solid electrolyte to feed our EV Line. We expect to begin producing our sulfide-based solid electrolyte from this facility in the second half of 2022.
We also expect to invest significant capital in 2022 in connection with the installation of our EV Line at our Louisville, Colorado headquarters. The EV Line is designed to produce EV-scale all-solid-state battery cells as part of the automotive qualification process, which we expect to enter in late 2022. We expect the EV Line will be operational in the third quarter of 2022.
We anticipate our total combined capital and operational expenditures for 2022 will be between $150 million and $170 million.
Long-Term Liquidity Requirements
We believe that our cash on hand is sufficient to meet our operating cash needs (including expenditures for the increased pace and scope of development as well as increased public company costs), working capital and capital expenditure requirements for a period of at least the next 12 months and longer term until we generate adequate cash flows from licensing activities and/or electrolyte sales.
We may, however, need additional cash if there are material changes to our business conditions or other developments, including changes to our operating plan, unanticipated delays in negotiations with OEMs and tier-one automotive suppliers or other
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suppliers, supply chain challenges, disruptions due to the COVID-19 pandemic, competitive pressures, and regulatory developments. To the extent that our resources are insufficient to satisfy our cash requirements, we may need to seek additional equity or debt financing. If the financing is not available, or if the terms of financing are less desirable than we expect, we may be forced to take actions to reduce our capital or operating expenditures, including by not seeking potential acquisition opportunities, or reducing or delaying our production facility expansions, which may adversely affect our business, operating results, financial condition and prospects. For more information about risks related to our business, please see “Risk Factors.”
In January 2022, we updated our investment policy to provide greater flexibility in investment options. We designed our revised investment policy primarily to maintain adequate liquidity to fund future operations, research and development, and anticipated capital expenditures, with a secondary goal to maximize yield on cash not required to be liquid for near term operations. To reduce the risk of economic, supply chain, and operational disruptions during the COVID-19 pandemic, we have allocated a sufficient portion of capital to serve as reserve cash.
Cash Flows
The following tables summarize our cash flows from operating, investing, and financing activities for the periods presented.
Year Ended December 31,
($ in thousands)
2021
2020
Net cash (used in) operating activities
(25,440)
(9,995)
Net cash (used in) investing activities
(88,883)
(1,060)
Net cash provided by financing activities
622,796
5,395
Cash flows used in operating activities:
Cash used in operating activities increased by $15.4 million from 2020 to 2021. This increase in cash use was primarily attributable to our operating loss of $26.5 million in 2021, compared to operating loss of $11.6 million in 2020. The increase was primarily attributable to an increase in research and development costs as well as increased general and administrative expense due to increased headcount. We expect cash flows used in operating activities to continue to increase as we continue to accelerate both the pace and scope of our development efforts, and work to achieve commercialization of our products. We also anticipate increased expenditures for general and administrative functions in connection with our status as a public company.
Cash flows used in investing activities:
Cash used in investing activities increased by $88 million from 2020 to 2021. This increase is due to capital expenditures of $12.6 million and purchase of marketable securities of $76 million in 2021. Capital expenditures were primarily for custom manufacturing equipment in connection with our planned expansion of electrolyte production. We expect cash used in investing activities to increase in 2022 and 2023 as we build out our second production facility and install our EV Line. Each location will require investment in specialized equipment to facilitate the manufacturing process of sulfide-based solid electrolyte and our all-solid-state battery cells, respectively. We expect capital expenditures to increase as our production processes are scaled in the future, especially with respect to our sulfide-based solid electrolyte.
Cash flows provided by financing activities:
Through December 31, 2021, we have financed our operations through proceeds from a bank term loan, and the sales of convertible notes, redeemable convertible preferred stock, and the business combination. We retired the bank term loan in December 2021. Net cash provided by financing activities increased by $617.4 million from 2020 to 2021. This increase is attributable to net proceeds of $135.6 million from the Series B Financing, and net proceeds of $495.4 million from the business combination in 2021.
Off-Balance Sheet Arrangements
We are not a party to any off-balance sheet arrangements, as defined under SEC rules.
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Critical Accounting Estimates
Our discussion and analysis of financial condition and results of operations are based upon our financial statements included elsewhere or incorporated by reference in this Report. The preparation of our financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. We base our estimates on past experience, technical analysis and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. Actual results may differ from those estimates.
Our critical accounting policies are those that materially affect our financial statements and involve difficult, subjective, or complex judgments by management. A thorough understanding of these critical accounting policies is essential when reviewing our financial statements. We believe that the critical accounting policies listed below involve the most difficult management decisions because they require the use of significant estimates and assumptions as described above.
Stock -Based Compensation
Description
Judgments and Uncertainties
Effect if Results Differ From Assumptions
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 employee stock options, to be recognized in the financial statements based on their fair values.
The grant date fair value of Legacy Solid Power’s common stock was historically determined by its board of directors with the assistance of management and an independent valuation.
As of December 9, 2021, our common stock is publicly traded, and the fair value is based on the closing market price on the date grants are made.
Under the provisions of ASC Topic 718, we determine the appropriate fair value model 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.
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Common Stock Warrants
Description
Judgments and Uncertainties
Effect if Results Differ From Assumptions
Common stock warrants are classified as a liability, in accordance with ASC Topic 815, as they do not satisfy the criteria to be classified as equity based on the indexation criteria. Public and private warrants are recorded at their fair value at the date of issuance, and subsequently remeasured at each reporting period end. Any change in value is recognized through the consolidated statement of operations.
Valuation of private warrants requires that we make significant judgments and assumptions related to the fair value based on the valuation model. We consider the most significant assumption to be the estimated volatility of our common stock.
If we were to change our judgments or estimates used in valuation of private warrants, it could cause a material increase or decrease to expense realized from the change in fair value of public and private warrants, and to the underlying warrant liability.
Collaborative Revenue
Description
Judgments and Uncertainties
Effect if Results Differ From Assumptions
We recognize revenue from our research and development collaboration agreements representing joint operating activities in accordance with ASC Topic 808, Collaborative Arrangements. The elements of the collaboration agreements in which both parties to the contract are active participants and to which both parties are exposed to significant risks and rewards that are dependent on the commercial success of the efforts under the contract are recorded as collaborative arrangements.
Our revenue recognition accounting methodology requires us to make significant estimates and assumptions, and to apply professional judgment.
Collaborative revenues from cost-based contracts are recognized based on costs incurred during each period plus any earned fee. Contract costs include all direct labor, subcontract costs, costs for materials and indirect costs related to the contract performance that are allowable under the provisions of the contract. Collaborative revenues from fee-based contracts are recognized based on costs incurred to meet contractually defined milestones and deliverables along with our assessment of achievement of those measurable deliverables under the contract.
If we were to change our judgments or estimates, it could cause a material increase or decrease in the amount of revenue or deferred revenue that we report in a particular period.
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Research and Development
Description
Judgments and Uncertainties
Effect if Results Differ From Assumptions
Our Company is in the research and development phase. Our product offering relies heavily on new technology currently undergoing development and does not yet meet standard specifications to be sold commercially. Therefore, all related costs are currently accounted for as part of research and development expense in the Consolidated Statement of Operations. The criteria established by the Company to determine when commercialization has been reached includes the length of time the units have been operational in the field and the level of performance at which those units operate. As we transition from the research and development phase and into a full commercial phase, all inventoriable costs will be capitalized. As of December 31, 2021, the criteria for commercialization have not yet been met.
Research and development costs require us to make judgements regarding our progress toward commercialization. We routinely assess this progress to prepare for the change in cost treatment.
If we were to change our judgement regarding research and development costs or our progress toward commercialization, it could cause a material change in cost treatment.
Emerging Growth Company Status
We are an emerging growth company as defined in Section 2(a) of the Securities Act and have elected to take advantage of the benefits of the extended transition period for new or revised financial accounting standards. We expect to remain an emerging growth company at least through the end of the 2022 fiscal year and expect to continue to take advantage of the benefits of the extended transition period, although we may decide to early adopt 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 because of the potential differences in accounting standards used.
Recent Accounting Pronouncements
See Note 2 to our audited financial statements, which are incorporated by reference, for more information.
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