Earnings Call: Q3 2022

Nov 8, 2022

Greetings. Welcome to the Solid Power third quarter 2022 financial results and business update call. Please note that this conference is being recorded. I will now turn the conference over to your host, Jennifer Almquist, with investor relations for Solid Power. Thank you. You may begin. Thank you, Stacy, and thank you everyone for joining us. Joining me on the call today are Solid Power's Chief Executive Officer, Doug Campbell, and Chief Financial Officer, Kevin Paprzycki. A copy of today's press release is available on the investor relations section of our website at ir dot solidpowerbattery.com. Before we get started, I'd like to remind you that parts of our discussion today will include forward-looking statements as defined by U.S. securities laws. These forward-looking statements are based on management's current expectations and assumptions about future events and are based on currently available information as to the outcome and timing of future events. Except as otherwise required by applicable law, we disclaim any duty to update any forward-looking statements to reflect future events or circumstances. For a discussion of the risks and uncertainties that could cause actual results to differ materially from those expressed in our forward-looking statements, please see our most recent filings with the Securities and Exchange Commission, which can be found on our website at ir dot solidpowerbattery.com. With that, let me turn it over to Doug Campbell. Thank you, Jen. Good afternoon, everyone, and thanks for joining us. I'll begin today with an update on our business, then I'll pass it over to Kevin for a brief review of the financials. After that, I'll provide some concluding remarks, and we'll open the call to your questions. Since we last spoke, our team has continued its solid execution on our development milestones, though we faced operational challenges during the quarter that I will discuss in a moment. In summary, we made 20 Ah cell deliveries to our automotive partners. We have continued to optimize our EV cell pilot line and recently began production of full-scale EV cells. We have continued to make meaningful progress on the construction of our electrolyte production facility, and we have remained on track to begin powder production at our new electrolyte production facility in the first quarter of next year. I continue to be pleased with our team's execution as we position Solid Power for the long term. Let me take a moment to add a little color on each of these key milestones. First, with respect to 20 amp hour cell deliveries. During the third quarter, we began delivering 20 amp hour cells to both Ford and BMW. To date, we have delivered over 150 of these 20 amp hour cells. These cells are currently being tested by us, our partners, and third-party testing facilities. Preliminarily, we are encouraged by what we're seeing as we scale from the 2 amp hour to the 20 amp hour cell format, though a lot of work is still needed to hit our partners' commercialization targets. Further, I am pleased to say the performance of these cells drove customers to confirm additional 20 Ah cell orders during the third quarter, which is encouraging. These additional orders led to a significant increase in 20 Ah production during the third quarter. However, as we began increasing the production rate and volumes to meet the demand, we experienced lower initial yields. To be clear, lower initial yields for the 20 Ah cell production in comparison to our previous 2 Ah cell builds was not unexpected, as it represents over an order of magnitude increase in production volumes, including input materials, slurries, coated layers, et cetera. It is also worth stating that we view these yield challenges as opportunities to refine our higher volume production processes, and we remain optimistic that the learnings we achieve at our present production volume will translate to our next stage of production volume, such as entering into A-sample. Our production during the quarter was also impacted by a few other issues. We saw some minor delays in the availability of materials we needed. We also experienced quality issues with some of our commodity input materials. Our team did a good job mitigating delivery delays, but it did impact our schedule. We continue to work with all of our suppliers to implement stronger upfront processes to mitigate the risk of future quality issues. Lastly, we also saw some not insignificant tightening in the labor market. While we are still successfully recruiting talent, we have seen longer lead times for hiring, which have put us slightly behind in our resource plan. This is driven in part by increased competition for battery scientists, engineers, and technicians. We are excited about some of the preliminary and creative things we are working on to allow us to continue to add talented team members. Overall, higher production volumes, lower initial yields, supply issues, and hiring challenges together meant that a majority of our time and resources were focused on 20 Ah cell builds during the third quarter as we prioritized our partners' needs. There remains a lot of work for our team, both in terms of technology development as well as in the scaling up of our production processes. That said, I'm happy to report that we were able to achieve improvements in cell production yields over the course of the third and into the fourth quarter, although further improvements in yield are needed to hit our production targets. We are pleased with the demand for 20 amp-hour cells. I'm proud to say the team is rising to the occasion through the challenges we experienced this quarter. We currently expect to deliver a few hundred more 20 amp-hour cells to our partners in Q4 this year before we can focus more of our efforts and resources on EV cell builds and entry into the A-sample phase. To that end, we were able, during the third quarter, to continue our work to optimize the EV cell pilot line and have made progress with the coding, calendaring, and laminating processes, which we believe positions us well as we begin to ramp production. While we did not make any EV cells during the third quarter due to our focus on the production of the 20 amp hour cell format, initial cell builds have begun as of last week. We anticipate that the pace of EV cell production will increase through the remainder of the year as we ramp down 20 amp hour cell production. We do, however, recognize that this shift does introduce some risk into our EV cell timeline. Optimistically, we think we can deliver a limited number of EV cells to our customers and third-party testing houses before the end of the year. This would allow us to enter into A-sample phase in 2022, thereby achieving our original target milestone. However, it is possible that these EV cell deliveries and our entry into A-sample qualification could slip into 2023. In summary, we are continuing to push hard to achieve A-sample in the coming months, and we will provide a more in-depth operational update in 2023 as we fully assess our production results over the quarter. Lastly, turning to our electrolyte production facility and powder production. Construction of the electrolyte production facility has continued to progress nicely and is now nearing completion. In particular, all infrastructure construction is complete, and we have received a full certificate of occupancy, which has allowed us to place R&D, quality, and cell testing equipment in its final location for use by those departments. It should also be noted that move-in for this new facility is already underway as of last week in order to support our growing technical and support staff. Further, a majority of the electrolyte production equipment has been delivered and placed in their final production location, facilitating the start of the process installation. The remaining equipment is currently undergoing acceptance testing at the equipment vendor's location. We fully expect the remaining pieces of equipment to be installed by the end of the present quarter. Our progress to date is encouraging and gives us a higher degree of confidence that the electrolyte pilot production line will be commissioned and validated in early 2023. We fully expect powder production volumes to ramp throughout next year as our needs increase for both EV cell builds and potential future supply. We look forward to taking this key step towards becoming the industry leader in solid-state battery materials. We have some great pictures on our online blog that illustrate the incredible progress we've made over the last several months. My thanks to the team for their continued strong execution on this key project. With that, I'll pass it over to Kevin to take you through our first quarter results. Kevin? Thanks, Doug, and good afternoon, everyone. I'll start out with an overview of our financial results and then discuss our financial outlook for the year. We generated third quarter revenue of $2.8 million, bringing our year-to-date revenue up to $7.6 million. Our team again did a great job delivering on program milestones. Operating expenses for the third quarter were $18.4 million. Similar to earlier quarters in 2022, these expenses reflect increased direct program costs on higher revenues, increased labor and materials driven by our operational and development investment, and investments in our SG&A platform to support Solid Power's operational teams. Our operating loss for the third quarter was $15.6 million, and net loss was $12.4 million. Turning to our balance sheet and liquidity position. In the third quarter, we invested just under $10 million in operations and almost $21 million in CapEx, which was primarily for the new electrolyte production facility. We ended the quarter with total liquidity of just over $507 million, consisting of cash, marketable securities, and long-term investments. As we look forward for the remainder of the year, for our revenue, we had said last quarter that our second half revenue will be lower than the first half revenue. We still believe this to be true, though by a narrow margin due to strong Q3 execution. For our 2022 cash investment, the small shift in our electrolyte production and EV cell production shifted the timing of our projected fourth quarter investments a bit. We will be pushing out around $25 million of capital from 2022 into 2023, which will reduce our projected CapEx spend to around $75-$80 million total for the year. Our operating cash invested will likely be around $45-$50 million for the year, though we should see an increase in Q4 as we start EV cell production. We now expect 2022 total cash investment to be between $120 and $130 million. As a result, we expect our 2022 ending liquidity to be in the range of $460-$470 million. Just to reiterate before I hand the call back to Doug, there have been no real changes to our overall operations plan, only a slight change in investment timing from 2022 to 2023. Doug? Thanks, Kevin. Wrapping things up, we continue to make good progress towards our long-term goals. Although I've stated it before, let me be clear, our focus has and will always remain on the long term. We believe the investments we're making now, as well as our ability to execute in light of challenging operating conditions, will strengthen the business and enable us to meet our long-term goal of being a solid-state battery industry leader. I look forward to updating you on our progress again during our next earnings call. Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Your first question comes from Mike Shlisky with D.A. Davidson. Please go ahead. Yes, hello, and thank you for taking my questions. I guess I wanted to get a feel for the question you've had on the initial yields as you ramp up the 20 amp hour cells here. Do you have to have any extra cash need to get that up to speed? Or is it just something that's gonna get itself worked out over time without much additional investment beyond the time you've already spent here in the last few weeks or so? Well, thanks, Mike. This is Doug. That's a good question. I guess the short answer to your question is, we don't anticipate needing to deploy any additional capital to addressing yield beyond, I believe, what you referenced to, which is just some additional time, to work through the yield challenge. I do wanna emphasize, and I stated this in the earnings call, it isn't unexpected that when we go from a 2 amp hour cell build to a 20 amp hour cell build, that we're gonna see some drop in yield because it really does represent over a 10X increase in really everything. 10X increase in input material, 10X volume of slurries, 10X, you know, coated surface area of layers. What that means is obviously the sensitivity to any form of defect of, you know, goes up quite a bit because you just need a lot more stuff to build your cells. It wasn't unsurprising. Again, we felt it was important to make note of it and to, you know, let the investment community know that we're laser focused on it, and most importantly, it is improving. Okay, great. Can you also give us a little bit more color on the labor availability you discussed during your prepared comments there? Can you give some examples of some proactive steps you've taken to help address those issues, whether it's getting more out of the current workforce you've got or other enticements to try and find some of the specialized labor that you're looking for? Yeah, absolutely. I'm gonna stop short of getting into specific strategy, and I'm sure this will probably resonate with you. For no other reason, I don't wanna tip my hat to others as to the routes that we're taking to get talent in. What I can say is that in the spirit of really optimizing our current staff, we have, you know, transitioned to, with some of our operations to dual shift. We will continue to look for opportunities to do that, especially as we ramp up our second electrolyte production facility. Okay. Maybe the last one for me, you know, I didn't hear it mentioned really, Doug. We have had the recent Inflation Reduction Act. It's supposed to, you know, help to improve the adoption of EVs and some of the timelines to be accelerated on various products. Do you think that Solid Power has anything that can benefit from other, you know, from grants or other subsidies directly from the bill? Or is most of what you think might happen here more indirect, you know, getting autos to be adopted, just EVs in general? Again, I'm just kinda curious, is there anything that you think is directly laser focused on either your cost structure or on your business over the next couple of years here? Hey, Mike, it's Kevin. I'm gonna take that one. Good afternoon. Hey, we're excited about the IRA and the benefit to Solid Power, and that's both the, you know, the indirect benefit that you mentioned, just lifting all of the the entire EV market. But also, you know, how we benefit directly from the tax credits. Like everyone else, we're waiting for detailed guidance from the Treasury Department, so everything's a little bit premature. But right now, we're pretty confident there's two ways we can benefit. And you know, one of the credits is based around production, and we think our electrolyte sits right there. And the other is based around investment in production facilities. And so there's these are two mutually exclusive options for us that we can take advantage of. We've got some top-notch partners that we're working on to help us determine, you know, which of those alternatives will benefit Solid Power the most. Are there changes in our operations that we can make to maximize the benefit? As we go through that exercise and get more clarity here in our plan, we'll certainly share that update. Okay. Kevin, Doug, I appreciate the discussion. I'll pass it along. Thank you. Once again, if you would like to ask a question, please press star one on your telephone keypad. Your next question comes from Gabe Daoud with Cowen and Company. Please go ahead. Hey, thank you, and thanks, Doug and everybody, for the prepared remarks, and all the detail. Doug, I was hoping you could maybe just give us a little bit of color on the performance of the 20 amp-hour cells. You know, you indicated that your partners initially I guess performance hits some of their milestones to ask for more increased orders. Just curious if you could talk a little bit about that, some of the feedback maybe, and then just the roadmap or the hurdles from here to improve performance on the 20 amp hours. Yep. Absolutely. That's a great question. You're absolutely correct that, you know, our partners were absolutely encouraged with, you know, what they were seeing with this initial round of 20 amp hour cells. I can't get into details as to precisely why they have increased their orders because, again, that's sensitive information that's not mine to share. What I can say is previously I have broadly described how our interactions, our cooperations with our auto OEM partners has sort of shifted from, let's just say, a feasibility demonstration into really more of a legitimate vehicle integration demonstration. I think it's fair to cast these potential additional activities around, you know, in that category of doing, you know, broader demonstration type activities. We were obviously very encouraged. It was a case of good news, bad news, coupled with, you know, the labor constraints in that, you know, the good news is great, more orders for 20 amp hour cells. The bad news is, well, that's, it's gonna cause us to focus more of our resources on the 20 amp hour than we had originally planned, and meaning there's a delay in getting the EV cell line up and running. We hope over this quarter to make that transition. Understood. Thanks, Doug. That's helpful. I'll hop back in. Thanks, guys. Mm-hmm. Your next question comes from Brian Dobson with Chardan Capital Markets. Please go ahead. Hi. Thanks very much. I guess given your recent deliveries to joint development partners and your conversations with those in the EV space, what are you hearing in terms of production goals or outlooks or supply chains in terms of EV, that you could share with us? Well, what I can share is, and I think Kevin touched on this, there has been no change in our development plan that we've shared in the past. You know, as stated in the call, our goal is hopefully by the end of this calendar year to kick off A-sample phase, although admittedly that may slip into early 2023, and then get us into, you know, successfully completing a B-sample validation phase in the 2024 timeframe. Again, that is a major achievement because that is full design freeze in automotive speak. There really is no change in our development plan. The production volumes that we have targeted for SP2, which is our electrolyte production facility, those production targets also remain unchanged. We hope in the first part of next year to have SP2 hitting those production targets. Yeah, excellent. Thanks very much. Thank you. We've come to the end of the Q&A session. I will turn the floor over to Doug Campbell for closing remarks. Well, I just would thank the audience for sitting through today's earnings call, and we appreciate the opportunity to update the investment community on how the company is going. We remain very optimistic on our business, recognizing that there are certainly some headwinds out there. Frankly speaking, I think we're all experiencing those even as consumers. You know, we're doing the best we can to execute on our model, and we're very pleased with how things have gone throughout this entire year. With that, we will close today's call. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.