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 “Cautionary 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 under “Part I, Item 1A. Risk Factors,” as such descriptions may be updated or amended in future filings we make with the SEC. Unless indicated otherwise, the following discussion and analysis of financial condition and results of operations should be read in conjunction with the consolidated statements and notes thereto in this Report. 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 solid-state battery technology for EV and additional markets served by battery manufacturers.
Our core technology is our proprietary solid electrolyte material, which replaces the liquid or gel electrolyte used in traditional lithium-ion batteries. We believe that our electrolyte material can improve driving range, battery life, safety performance, and battery costs.
We are also developing solid-state cells with our electrolyte, with the aim of commercializing our technology by selling our electrolyte material and licensing our cell designs. This approach is capital light, unlike other battery manufacturers who require significant production facilities and equipment. This strategy allows us to focus on our core strengths of electrolyte production and solid-state technology development.
We currently produce our electrolyte on a pilot manufacturing line, which is used in our cell development and for customer sampling. We currently develop our cells on our two pilot lines, producing multiple cell sizes to both support our partners and refine cell designs. Longer-term, we expect our pilot lines to focus on research and development.
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We have partnered with industry leaders BMW, Ford, and SK On and will continue to work closely with our partners to improve cell designs, produce electrolyte material, and commercialize our technology. Our products are currently in the development stage and require further research and improvement before we can commercialize our technology. For more information, see “Risk Factors – Risks Related to Development and Commercialization.”
Key Factors Affecting Operating Results
We are a research and development-stage company and have not generated significant revenue through the sale of our electrolyte or licensing of our cell designs. Our ability to commercialize our products depends on several factors that present significant opportunities for us but also pose material risks and challenges, including those discussed in the “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements,” sections of this Report, which are incorporated by reference.
Prior to reaching commercialization, we must improve our products to ensure they meet the performance and safety requirements of our customers. We also will have to continue to negotiate licensing and supply contracts with our customers on terms and conditions that are mutually acceptable. We will need to scale production of our electrolyte material to satisfy anticipated demand. All of these factors will take time and affect our operating results. Since many factors are difficult to quantify, our actual operating results may be different than we currently anticipate.
Our revenue generated to date has primarily come from performance on research and development licensing activities and government contracts. We continue to deploy substantial capital to expand our production capabilities and engage in research and development programs. We also expect to continue to incur significant administrative expenses as a publicly traded company.
In addition to meeting our development goals, commercialization and future growth and demand for our products are highly dependent upon consumers adopting EVs. The market for new energy vehicles is still rapidly evolving due to emerging technologies, competitive pricing, government regulation and industry standards, and changing consumer demands and behaviors.
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
The following table is a consolidated summary of our operating results for the periods indicated:
Year Ended December 31,
(in thousands)
2023
2022
Change
%
Revenue
$
17,410
$
11,789
$
5,621
48
%
Operating Expenses
Direct costs
27,731
9,592
18,139
189
%
Research and development
54,749
38,592
16,157
42
%
Selling, general and administrative
25,550
22,724
2,826
12
%
Total operating expenses
108,030
70,908
37,122
52
%
Operating Loss
(90,620)
(59,119)
(31,501)
53
%
Nonoperating Income and Expense
Interest income
20,265
8,476
11,789
139
%
Change in fair value of warrant liabilities
4,890
40,903
(36,013)
(88)
%
Interest expense
(84)
(42)
(42)
100
%
Total nonoperating income and expense
$
25,071
$
49,337
$
(24,266)
(49)
%
Pretax Loss
(65,549)
(9,782)
(55,767)
570
%
Income tax benefit
—
(227)
227
NM
Net Loss Attributable to Common Stockholders
$
(65,549)
$
(9,555)
$
(55,994)
586
%
Other Comprehensive Income (Loss)
2,600
(3,159)
5,759
NM
Comprehensive Loss Attributable to Common Stockholders
$
(62,949)
$
(12,714)
$
(50,235)
395
%
NM = Not meaningful
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The key factors driving our 2023 increase in operating loss were as follows:
● Revenue and direct costs – our overall revenue and related direct costs increased for the period as a result of additional performance under our JDAs and government contracts.
● Research and development – our research and development costs increased for the period primarily as a result of increased labor costs and material consumption as we expanded the development efforts of our battery cells and electrolyte material. We expect our development costs to continue to increase as we continue to accelerate both the pace and scope of our development efforts.
● Selling, general, and administrative – our selling, general and administrative expenses increased for the period primarily due to additional use of outside professional services, additional planned hiring and workforce development associated with increasing our headcount to over 270 people, and enterprise resource planning system costs and implementation efforts .
● Operating expenses – non-cash stock-based compensation costs increased for the period across direct costs, research and development costs, and selling, general and administrative expenses related to our increased headcount.
● Nonoperating income – our nonoperating income decreased for the period primarily due to a lesser gain on fair value adjustment of warrant liabilities, partially offset by increased interest income related to strategic cash investment yields.
Liquidity and Capital Resources
Sources of Liquidity
Our primary sources of cash have historically derived from the sale of equity, with a small portion coming from performance on commercial revenues and government contracts.
As of December 31, 2023 and 2022, we had $415.6, and $496.1 million of total liquidity, respectively, as set forth below:
(in thousands)
December 31, 2023
December 31, 2022
Cash and cash equivalents
$
34,537
$
50,123
Marketable securities
141,505
272,957
Long-term investments
239,566
172,974
Total liquidity
$
415,608
$
496,054
Total current liabilities
$
15,879
$
20,733
Short-Term Liquidity Requirements
Our short-term liquidity requirements include operating and capital expenses needed to further our research and development programs and to further optimize our pilot production lines and electrolyte manufacturing capabilities. We anticipate that our most significant capital expenditures in 2024 will relate to finishing construction of our advanced electrolyte research facility and enhancing the capabilities of our electrolyte production facility.
We anticipate our total combined capital and operational expenditures for 2024 will be between $100 million and $120 million, which includes approximately $1.60 million for the payment of contractual cash obligations as of December 31, 2023, primarily related to payments for operating leases. We expect to fund our short-term liquidity requirements through our cash on hand and other liquid assets.
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Long-Term Liquidity Requirements
We believe that our cash on hand is sufficient to meet our operating cash needs and 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 also believe that we have adequate cash on hand for our $50 million stock repurchase program, which our Board approved in light of our strong cash position.
We may need additional cash if there are material changes to our business conditions or other developments, including changes to our operating plan, development progress, negotiations with OEMs, cell manufacturers, or other suppliers, market adoption of EVs, supply chain challenges, competitive pressures, inflation, 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. We also may opportunistically seek to enhance our liquidity through equity or debt financing, if such financing becomes available to us on terms that we consider favorable. If 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, which may adversely affect our development, business, operating results, financial condition and prospects.
Stock Repurchase Program
On January 23, 2024, we announced that our Board approved a stock repurchase program authorizing us to purchase up to $50 million of our outstanding common stock. Under the stock repurchase program, we may purchase shares of our common stock from time to time until the repurchase program expires on December 31, 2025. The shares of common stock may be purchased at management’s discretion on the open market, in unsolicited negotiated transactions, or in any manner that complies with the provisions of Rule 10b-18 of the Exchange Act. Management’s decision to repurchase shares will depend on a number of factors, such as the price of our common stock, economic and market conditions, and corporate and regulatory requirements.
Cash Flows
The following table summarizes our cash flows from operating, investing, and financing activities for the periods presented.
Year Ended December 31,
(in thousands)
2023
2022
Net cash and cash equivalents used in operating activities
$
(58,261)
$
(33,824)
Net cash and cash equivalents provided by (used in) investing activities
42,502
(429,985)
Net cash and cash equivalents provided by financing activities
$
173
$
485
Cash used in operating activities:
Cash used in operating activities increased from 2022 to 2023 primarily attributable to our operating loss, which was driven by continued increase in direct, research and development, and selling, general, and administrative expenses. We expect cash flows used in operating activities to remain at these increased levels as we continue the pace and scope of our development efforts and work to achieve commercialization of our products.
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Cash provided by (used in) investing activities:
Cash provided by investing activities increased from 2022 to 2023 primarily due to the net effect of increased purchase and sales of marketable securities, in addition to decreased capital expenditures for property, plant and equipment. Capital expenditures were primarily for custom manufacturing equipment in connection with our expansion of electrolyte production capabilities. As our production processes are scaled in the future for commercialization, especially with respect to our electrolyte material, we expect capital expenditures to increase.
Cash provided by financing activities:
Cash provided by financing activities for 2022 and 2023 were primarily related to the exercise of stock options and the sale of shares of common stock under the ESPP, partially offset by leased equipment payments.
Off-Balance Sheet Arrangements
We are not a party to any off-balance sheet arrangements, as defined under SEC rules.
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 estimates are those that materially affect our financial statements and involve difficult, subjective, or complex judgments by management. A thorough understanding of these critical accounting estimates is essential when reviewing our financial statements. We believe that the critical accounting estimates listed below involve the most difficult management decisions because they require the use of significant estimates and assumptions as described above.
Valuation of Private Placement Warrant Liability
Description
Judgments and Uncertainties
Effect if Results Differ From Assumptions
The private placement warrant liability is 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 placement warrants requires that we make significant judgments and assumptions related to the fair value based on the Black-Scholes model including term, stock price, volatility and the selection of guideline public companies, risk free rate and dividend yield.
If we were to change our judgments or estimates used in valuation of private warrants, it could cause a material increase or decrease to the gain or loss realized from the change in fair value of private placement warrants, and to the underlying warrant liability.
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, restricted stock units, and shares purchased through the
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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ESPP 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.
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 or based on appropriate over time methods.
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.
Leases
Description
Judgments and Uncertainties
Effect if Results Differ From Assumptions
Under ASC 842, at contract inception we determine if an arrangement meets the definition of a lease, as either operating or financing leases. At lease commencement, we record and recognize right-of-use assets for the lease liability amount and initial direct costs incurred, offset by lease incentives received. We record lease liabilities for the net present value of future lease payments over the lease term. The discount rate we use is generally our estimated incremental borrowing rate unless the lessor’s implicit rate is readily determinable. We calculate discount rates periodically to estimate the rate we would pay to borrow the funds necessary
Judgments made by management for our lease obligations include the determination of our incremental borrowing rate and the length of the lease term, which includes the determination of renewal options that are reasonably assured. We use our estimated incremental borrowing rate in determining the present value of lease payments for purposes of determining lease classification and recording lease liabilities and lease assets on our consolidated balance sheets. Our incremental borrowing rate is determined based on a synthetic credit rating, determined using a valuation model, adjusted to reflect a secured
These judgments may produce materially different amounts of depreciation, amortization and rent expense, right-of-use assets, and lease liabilities than would be reported if different assumed lease terms were used.
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Leases
Description
Judgments and Uncertainties
Effect if Results Differ From Assumptions
to obtain an asset of similar value, over a similar term, with a similar security.
credit rating and a developed spread curve, if applicable, applied to a risk-free rate yield curve. The lease term can affect the classification of a lease as finance or operating for accounting purposes, the amount of the lease liability and corresponding right-of-use lease asset recognized, the term over which related leasehold improvements for each facility are amortized and any rent holidays and/or changes in rental amounts for recognizing rent expense over the term of the lease.
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. 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, 2023, the criteria for commercialization have not yet been met.
Research and development costs require us to make judgments regarding our progress toward commercialization. We routinely assess this progress to prepare for the change in cost treatment.
If we were to change our judgment regarding research and development costs or our progress toward commercialization, it could cause a material change in cost treatment.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are a smaller reporting company as defined in Rule 12b-2 under the Exchange Act. As a result, pursuant to Item 305(e) of Regulation S-K, we are not required to provide the information required by this Item.
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