Factorial Energy Q3 2026 Earnings Call Transcript

Factorial Energy (NASDAQ:FAC) reported third-quarter financial results on Tuesday. The transcript from the company’s third-quarter earnings call has been provided below.

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Summary

Factorial Energy reported its first customer revenue ahead of the 2027 timeline, marking a significant milestone with aerospace applications.

The company achieved an energy density of 450 watt-hours per kilogram in its drone program cells, surpassing previous targets.

Strategic partnerships were formed, including with SK On and Mitsui Kinzoku, to expand manufacturing capabilities and secure the supply chain.

The company expects revenue growth through increased customer base, improved cell performance, and automotive market entry, with a focus on a fabless business model.

Non-GAAP operating expenses are projected to be under $40 million for the year, with capital expenditures slightly under prior expectations.

Full Transcript

OPERATOR

Greetings and welcome to Factorial’s third quarter 2026 results conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce Brad Kray, Investor Relations. Thank you. You may begin.

Brad Kray (Investor Relations)

Thank you and good afternoon. With me today are Dr. Siyu Huang, Co‑Founder and Chief Executive Officer, and Richard Wei, Chief Financial Officer. Earlier today we published our third quarter shareholder letter on the Investor section of our website at ir.factorialenergy.com. The company uses its website to disclose material, non-public information and to comply with its disclosure obligations under SEC Regulation FD. We encourage investors to monitor the site and sign up for email alerts.

Today’s discussion contains forward-looking statements within the meaning of applicable securities laws, including statements regarding industry trends, our 2026 outlook, the timing and amount of commercial revenue, manufacturing plans, partnerships, technology development, business plans and milestones. Actual results may differ materially. Please review the risk factors described in our Quarterly Report on Form 10‑Q for the quarter ended September 30, 2026 filed today and in our other filings with the SEC.

Factorial disclaims any obligation to update forward-looking statements except as required by law. During this call we will refer to non‑GAAP operating expenses, a financial measure that is not prepared in accordance with generally accepted accounting principles. We define non‑GAAP operating expenses as total operating expenses excluding depreciation and amortization, stock‑based compensation, the previously disclosed legal judgment, and for 2025, the loss and impairment on lease termination, all of which are reconciled in our shareholder letter.

Beginning this quarter, non‑GAAP operating expenses no longer exclude non‑cash lease expense. Management uses this measure to plan and evaluate the ongoing costs of operating the business. It has limitations, should not be considered in isolation, may not be comparable to similarly titled measures used by other companies, and is not a substitute for the most directly comparable GAAP measure. A reconciliation to GAAP operating expenses is included in our shareholder letter.

With that, I’ll now turn the call over to Cuz.

Siyu Huang (Chief Executive Officer)

Thank you and good afternoon, everyone. Factorial Energy’s first quarter as a public company delivered a moment years in the making. We recorded our first strong customer revenue well ahead of the 2027 timeline we set. We’re now supplying cells that power real products for paying customers. In just a few months, aerospace took us from sampling to system integration to a world record to commercial order and recognized revenue. The speed was built on years of development work with our automotive partners.

We have proven our partnership, system-level validation, and that order. Aerospace is the first proof point, and automotive is next with a longer runway and a far greater opportunity. We have always planned to go market by market, starting where customers pay for performance and make decisions quickly. Right now, that is drones and aerospace. We also see few large battery makers competing for drone batteries today, and suppliers from foreign entities of concern face growing restrictions in the U.S. That leaves room for a new supplier. Our first revenue came from the aerospace order we announced in July from a leading U.S. drone maker.

We began delivering cells under that order this quarter. A test flight shows what a cell can do. A purchase order shows what it’s worth to a customer. In July, we formed a strategic partnership with Tulip Tech following customer tests that showed more than 30% longer range with our solid-state lithium-metal batteries, in part due to a 20% reduction in battery weight before any engineering optimization. Also in July, a drone built by Titan Dynamics and powered by our lithium-metal flight cells set a world record for flight duration in Group 1 drones, the lightest drone group up to 20 pounds, at a Game of Drones testing event at Edwards Air Force Base in California, with 521 minutes in the air, covering roughly 300 miles.

In August, our solid-state lithium-metal cells powered the winning aircraft in a DARPA LiFT Challenge, which carried a payload of nearly four times its own weight. For drone makers, battery performance is one of the fastest levers to better mission capability. These results give customers independent, well-corroborated proof that our solid-state delivers as they move from testing toward production. From here, we expect revenue to grow in three ways. The first is more customers. We’re working to qualify our aerospace products with additional customers. Starting in October 2027, the Department of Defense will restrict batteries from named FEOC (foreign entities of concern) manufacturers. Qualifying a new cell maker takes months, so drone makers are picking their suppliers now. Our U.S. headquarters and our fabrication in the United States and South Korea align with that shift.

The second is better cells. In a drone, energy density decides how far it flies and how much it carries. Last quarter, we said we expected our drone program cells to move toward approximately 450 watt-hours per kilogram by year-end. We have achieved 450 watt-hours per kilogram as of today, about 15% higher energy density than the cells that powered our world-record flight this year, and we continue to target further improvement next year. That work builds on the FEST B samples we delivered to Mercedes-Benz, which came in at about 390 watt-hours per kilogram.

It shows how much synergy our automotive program has to our high-spec applications. The next job is to carry those gains from development cells into production cells at consistent quality, because that is what turns the performance lead into orders. Independent testing, including nail penetration, crush, and thermal tests, has confirmed the safety of the FEST cells we have delivered. Solstice is our all-solid-state battery platform with no liquid inside.

We have built those cells as large as 40 amp-hours and delivered them to partners for validation separate from the drone program target. It is designed for up to 450 watt-hours per kilogram, and it has enhanced thermal stability when compared to conventional lithium-ion battery cells. That makes it a fit for robotics, space systems, and other uses that need longer cycle life and high thermal stability. The third is automotive, a much bigger market that moves on a longer timeline. It follows the same path as aerospace: partnership, system-level integration, and commercial order. Over the years, our work there has grown from one vehicle to several across brands and regions. Mercedes-Benz will put our results on public roads in 2025. Stellantis built them into a Dodge Charger Daytona development vehicle this year, and right after quarter-end, Stellantis showed the Peugeot RCZ Vision concept car with the solid-state battery developed together with Factorial Energy.

Our next major milestone in automotive is a production take-up agreement with a mainstream automaker. Building on the supercar order we received in January, an agreement would set us up to ramp toward volume production by the end of the decade. This is how we’re different: partnership, system-level integration, to commercial order. Each step takes years of effort. Many companies have technologies on paper in a lab, but having a claim on performance is different from having announced partnerships with leading customers with substantial investment and support over the years. Having just partnership is different from having those partners building the vehicles on the ground and in the air, not only just functioning, but setting the world record.

Having that system integration for an innovative product is different from having a commercial order. We’re not just living on the promise, but the track record. We shared that we would have the first revenue by 2027, and we delivered in Q3 2026. Today, we build cells on our pilot line in South Korea and at our headquarters near Boston. Those lines have shipped thousands of large-format cells to automakers for testing, and our lines in South Korea can switch between the lithium-metal and silicon versions of FEST. Next, we’re expanding our own lines with FEST by the end of ’27 and Solstice by the end of ’28. The new FEST line is being designed to make commercial cells built to the performance requirements of aerospace and physical AI applications.

Then we plan to scale through partners. We designed FEST so that a line can reuse up to 80% of the equipment in conventional lithium-ion lines. That lets us grow through our partners’ existing batteries rather than new ones. It also avoids much of the cost and environmental impact of new construction. In July, SK On, one of Korea’s leading global battery manufacturers, signed a memorandum of understanding with us to jointly evaluate producing our battery technologies across its global manufacturing network. SK On is our second significant industrialization partner this year, which is major progress toward our fabless business model. It has more than 200 gigawatt-hours of annual production capacity worldwide, including about 100 gigawatt-hours in the United States.

On the supply chain side, in September we signed a joint development agreement with Mitsui Kinzoku, a leading manufacturer of sulfide solid electrolyte, to help industrialize Solstice. Its sulfide solid electrolyte is advancing toward mass production at a dedicated plant in Saitama, Japan. This builds on our partnership with POSCO Future M, a leading cathode and anode materials provider in Korea. With Mitsui Kinzoku joining POSCO Future M, we now have partners for all three key active materials of Solstice, which positions us to move Solstice to scale.

We’re also working with Fuel Energy, a leading Korean maker of battery stacking and assembly equipment and one of our investors, to build out the manufacturing infrastructure for Solstice. Our partnership coalition, led by Factorial Energy, is designed to match the scale of today’s largest cell makers through a fabless model. We believe the market will divide into designers and contract manufacturers. Our innovation extends beyond materials and cell technologies into manufacturing engineering, and we bring that expertise to our partners’ lines to raise yield and quality. Partners can supply manufacturing capacity. The know-how to make solid-state batteries work reliably at scale is hard to come by, and that is what we bring.

Backed by more than 150 patents and patent applications, our work covers manufacturing, materials, and the supply chain. In manufacturing, yield has a large effect because every scrapped cell adds to the cost of the good ones. When we began production of our first technology, yield was low. Our pilot line has since demonstrated yield of about 85%, compared with the 70% to 80% that state-of-the-art lithium-ion battery pilot lines typically target. With everything else held equal, that improvement has cut the cost of every battery cell by more than 80%. Solstice’s dry cathode process also uses less energy and avoids the volatile organic compounds that come with solvent-based processing.

In materials, our lithium-metal cells follow a different cost curve from silicon-anode cells. With silicon anodes, more energy density takes more silicon, and the cell gets more expensive. With lithium metal, more energy density comes from a thinner anode, which means less material. Over time, we believe that can make our lithium-metal cells less expensive than silicon-anode cells. And because neither platform needs rare earth metals, we believe our cell cost can approach that of lithium-ion and become competitive as volume and our supply chain grow.

In the near term, we’re focused on holding yield as volumes rise, qualifying our drone products with more customers, and moving Solstice toward industrialization with POSCO Future M, Mitsui Kinzoku, SK On, Fuel Energy, and our manufacturing partners. For now, we see significant opportunities in physical AI, automotive, and energy storage. With that, Richard will take you through the numbers and our outlook.

Richard Wei (Chief Financial Officer)

Thank you, Siyu, and good afternoon everyone. Our revenue milestone in the quarter represents an early step toward a much larger opportunity. The full detail is in the letter, so I will focus on how this business is built to grow and how we plan to generate attractive returns from that growth. The opportunity ahead of us is enormous. The IEA and McKinsey project that global battery demand will grow significantly by 2030 to several terawatt hours at gigawatt factory scale. We’re going to grow with that demand through our industrialization partners’ capacity in the highest-specification market. We’re expanding with a mix of our own capacity and our partners to serve our first customers. We’re expanding fast by the end of 2027, and sources by the end of 2028.

Both are on track. Revenue follows the same logic. In high-stakes markets such as aerospace, robotics, and supercars, we sell finished cells, supplied from our own lines within our current capital plan and supplemented by contract manufacturer sales where appropriate. In automotive, the much larger market, we expect our industrialization partners to contribute installed manufacturing capacity and we see two ways to earn revenue from it: contract manufacturing and joint manufacturing.

In contract manufacturing, partners manufacture cells that are designed under contract and we earn revenue on those sales. In joint manufacturing, partners license our technology and make cells themselves. Licensing generates less revenue per sale than contract manufacturer sales, but we expect it to carry higher margins and require little of our own capital. Separately, we expect to earn revenue from supplying key materials and from engineering services.

The third quarter is a starting point. Revenue was approximately 26,000 from our first cell shipments under the aerospace order we announced in July. Gross loss was 1.8 million. Nearly all of it came from a write-down of inventory. During the quarter, we built up inventory ahead of orders to support near-term demand. Those cells are on hand and available to sell. At these early volumes, our fixed costs are spread over relatively few cells and material prices are higher, so each cell costs more than we expect to sell it for.

We carry the cells at what we expect to receive when we sell them and record the difference as the cost. The size of the write-down largely reflects how much inventory would build up as production scales. We expect higher labor productivity, overhead spread across more units, and lower material prices to bring unit costs down, providing a highly compelling value proposition when compared to lithium-ion batteries. Non-GAAP operating expenses were 9 million for the quarter and 24 million year to date, mostly for research and development, sales and marketing, and the operating infrastructure behind the milestones Steve described. Non-GAAP operating expenses also exclude 4.1 million related to the legal judgments we previously disclosed. GAAP income was 8.8 million this quarter. That came primarily from a change in fair value of warrant liabilities of 24.0 million, a non-cash gain which moves with our share price.

Our nine-month GAAP net loss was 11.1 million. We now expect full-year 2026 non-GAAP operating expenses of 36 million to 38 million, below our prior outlook of approximately 40 million. The lower range reflects continued spending discipline and, in part, production costs that are now recorded in inventory and cost of revenues instead of operating expenses. The range implies higher spending in the fourth quarter as the timing of some costs shifted into that period.

We expect three-year capital expenditures of 10 million to 12 million compared with our prior outlook of approximately 13 million, mainly reflecting the anticipated timing of milestone-based equipment payments, some of which may move into early 2027. We expect more meaningful commercial revenue in 2027 as production programs begin. Until those programs ramp, revenue is expected to remain modest and to vary from quarter to quarter. We have reached our energy density target of approximately 450 watt-hours per kilogram in our aerospace program cells, and we expect to keep spending within our outlook and complete both line expansions on schedule. We believe our balance sheet, disciplined operating model, and capital-efficient manufacturing approach give us the runway to carry out our value creation plan.

With that, back to you, Siyu.

Siyu Huang (Chief Executive Officer)

Thank you, Richard. When we founded Factorial Energy, we believed that the world would need fundamentally better batteries. This quarter a customer paid us for cells for the first time, and we moved forward on each of the four priorities we started in June. These are early steps in building the energy layer, the battery infrastructure we believe will underpin the next era of aerospace mobility and physical intelligence. Our strategy has not changed. We prove our technology first in high-spec markets such as aerospace where performance matters and customers adopt quickly, then carry that proof into mainstream vehicles and a wider mobility market toward the end of the decade. There’s a lot left to do, and this team is ready for it. Operator, we’re ready for questions.

OPERATOR

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. One moment please while we poll for questions.

Our first question is from Derek Soderbergh with Cantor Fitzgerald. Please proceed with your question.

Derek Soderbergh (Analyst)

Yeah, hey everyone, congrats on the technical achievements as well as the commercial revenue. I’m curious if you can quantify the level of firm orders and repeat demand you guys see for 2027. And similarly, can you talk about maybe which qualification milestones in the near term might accelerate that demand? And then I’ve got a couple follow-ups.

Siyu Huang (Chief Executive Officer)

Yeah. Thank you so much, Derek. Again, thank you so much for being here today. In terms of the revenue, we haven’t disclosed the 2027 guidance yet, but we do see that as we ramp and after we get this initial order, we’re expecting to receive more meaningful revenue as we scale. And I think we’re in our first customer and first few customer qualification process right now. We’re potentially expanding to the next 10 customer qualification process. We’re under active testing with multiple of them as well.

And I think we’re anticipating that the customers will be moving faster and faster. And this is actually also surprising to us, and actually this customer moved faster than what we expected, and that’s why we were able to bring our first ramp ahead of our 2027 timeline. To your second question about qualification, I would say aerospace is our first one here, and we have just been in this market over the last few months since our acute investment. We also had our first partnership announcement to the first demonstration with system integration and validation to our commercial order. And we see that now we have to replicate the same process with other customers, even with bigger customers in the aerospace market.

On top of that, I would say the holy grail is really in the automotive space, and that’s what we see actually will likely follow the similar pattern. As you know, we had our first partnership announcements back in ’21 with Hyundai Kia, followed by investment with Mercedes, Stellantis, so the initial formation of the partnership coalition. And recently we also had additional OEM release with the partnerships as well. But I think what was most exciting in that journey is that we also built one of the world’s first solid-state battery vehicles with Mercedes last year, and it took on this record drive with 1,205 kilometers with a single charge.

And this really speaks to the value as we come to the system-level validation, and we see that’s going to be the next step to really focus on to bring this to the commercial order in the near future with automotive partners.

Derek Soderbergh (Analyst)

Got it. Super helpful. And I also wanted to touch on manufacturing yield. So your pilot line’s at 85% or above. I was wondering if you could maybe talk about the pace of improvement there that you’ve experienced and when we might be able to get to kind of that 95% plus that the industry targets. So just on that, was wondering if you could touch on that, and then was curious about the 85% yield number — is that end-to-end yield for cells produced?

Siyu Huang (Chief Executive Officer)

Yeah. So our line in Korea right now is roughly about 85% yield. Over the course of the last few years, as we ramped up, actually the yield was really low — it’s way below that. As you may know this industry very well, yield is really important for the cost as they align. With 20% yield, cost is roughly about four times that of a system with 80% yield. And the typical lithium-ion battery pilot line will run about 70% to 80% yield. And for our system, we’ve already got to 85% yield, which is state of the art.

And here we’re talking actually about assembly and formation only. It doesn’t include the coating process, but includes the IQC, the incoming qualification process for coating already. And I think for the gigafactory you will typically expect to be at least 95% or above. But with a pilot line of 80% plus yield, you’re on a good path to get the system to the gigafactory-level efficiency.

Derek Soderbergh (Analyst)

Got it, got it. Super helpful, appreciate the detail. And then finally just on the 450 watt-hour per kilogram achievement, can you talk about some of the other, I guess I’d call them trade-offs — you know, just on cycle life, discharge power — you’d mentioned, you know, some testing in various temperatures and things like that. What sort of cycle life and discharge power do you get with this level of density, and maybe talk about some of the applications that you guys are uniquely suited to go after.

There’s really not other technology like this, so just wanted to hear your thoughts on that. Thanks.

Siyu Huang (Chief Executive Officer)

That’s definitely a very discerning question. Apparently for the battery industry it’s all about a balancing act. It’s all about the trade-offs. And for our product, for this specific product that recently set the world record, we focused the development from that cell into even higher-energy and higher-power cell, initial cell, we literally brought it from the automotive world. After 10 years of development, we just had a smaller format from the Mercedes vehicle cell with a similar chemistry and put it on the drone and flew and got a world record.

However, for this new system, we’re targeting to really focus on range and power to set what really matters for the growing industry and for the aerospace that we’re targeting in the near term, a lot of them, they don’t really require many cycle lives and I mean it’s not really long cycles that you are looking for for those specific applications. And that’s why we have de-emphasized the cycle-life requirements, which is apparently much smaller than the automotive environment.

But the discharging capabilities or the power capabilities could be five to 10 times as high as what is required for the automotive industry. So this is where we’ve never seen before. But lithium metals though has actually a very unique advantage on that because for lithium ions, especially like silicon-graphite lithium-ion batteries, you will have a natural compromise between energy and power. Usually energy cells cannot deliver a high power and a high-power cell will have very limited energy.

When you try to push both, the cost can become a big issue, even if you’re getting remotely close. So that’s why we think that for this technology you will be able to get to the energy density much quickly, because lithium metal is literally the lightest metal on earth right now. And at the same time you can push for high power without the traditional physical limits that the lithium-ion battery is having.

Derek Soderbergh (Analyst)

Super helpful. Really appreciate it.

Brad Kray (Investor Relations)

Thank you, Derek.

OPERATOR

Our next question is from Colin Rush with Oppenheimer. Please proceed with your question.

Colin Rush (Analyst)

Thanks so much guys and congratulations on hitting the first revenue. I appreciate the detail on getting to the 450 watt-hours per kil, but I want to get a better sense of how much or what other advantages you might have at the pack level given the chemistry and some of the performance metrics that you guys are able to deliver. So just want to get a sense of that relative to some of the other chemistries out there.

Siyu Huang (Chief Executive Officer)

Yeah, that’s a great follow-up question to Derek’s earlier question. Actually there was one thing I forgot to mention is about the temperature and this is very relevant to your question, Colin. On the pack level, I think pack-level lithium metal, we also see a great thermal stability and also conductivity compared with silicon. We’re happy to share with you more details in a more deep-dive technical discussion. But in high-content silicon pack usually you will see a lot of heat generation at high power level. And for lithium metal you don’t see that because lithium in general is a much better heat conductor compared with silicon. And that’s why we think that I would say having high energy, high power without generating too much heat is definitely one advantage you can see at the pack level. On top of that, there is fairly similar integration effort needed for lithium metal compared with silicon.

But I would say there is a potential cost reduction that’s required for the system. And this is not only just for aerospace, but also for automotive as well. So if we have a lighter cell and you need very much similar in terms of integration for the drones, for example, and it can reduce the weight of the drone and it can reduce the overall cost for the system. For automotive it’s another different story. No matter if it’s for lithium metal or for silicon, if you can reduce the total weight of the vehicle, you can roughly reduce about for every pound you are saving.

It’s roughly about $5 of saving according to our customer’s feedback. And this matters a lot when you are not only just reducing the weight of the battery itself, but also the supporting structure like the steel and aluminum. Another important findings that we had recently, even about the power capability, because the lighter system you might be able to have even better power. For example, we had some recent discussion with motorcycle companies and they even shared that typically they will require very high power discharge.

But when you have a lighter system, you don’t even have to have extraordinary high power compared with traditional vehicles. So I think the lighter vehicles can also lead up to much higher power and longer distance performance.

Colin Rush (Analyst)

Excellent, that’s super helpful. And then as you get into proper commercialization here with customers, can you talk about the customer strategy and the sequencing here? I mean obviously you’re targeting a handful of different applications in different size orders. And certainly the commentary around automotive sales cycle and design cycle is well, you know, I think well understood, you know, but want to think about how many customers you’re working with order of magnitude on that, how those folks move through the sales pipeline into the production ramp as you get into this in a little bit more robust way next year.

Siyu Huang (Chief Executive Officer)

Yeah, we have been long-term true believer of starting with small and small market but with nimble and faster adoption of new technologies. That’s why we define this aerospace and physical AI and all this high-performance market as high-spec market. Even back in 2020 and early stage of the company during COVID time, that was a name that we initially defined ourselves as high-spec market. And as part of this ramp up, we believe that in the near term, in an intermediate term, automotive will be a real market for us to tap into.

It does have a commercial demand and automakers are willing to spend a lot of capital, especially in early days to support all of this development. Also, surprisingly, they were very supportive for us to get into the high-spec market to begin with. They say this is a strong validation in what they are trying to do and especially with the cell chemistry that’s almost the same as what they’re developing as of today. So in terms of pipeline in our drone and aerospace market, we see that this is a much more fragmented market. Not like automotive. If you grab the top five automakers, they’re probably 50% of the market already. But for drone it’s much more fragmented. I think we’re going to first of all find a few key customers or the key opinion leaders in the market and crack the code. That’s what we’re starting to build first and that’s why we’re working with this U.S. leading drone maker to build that initial success.

Then we’ll launch with volume because this cell is commercial-ready and we’re scaling with volume. I think this process we see typically takes anywhere between nine months to a year to get to fruition. But I think it’s going to be much faster than automotive when it comes to automotive qualifications. It’s also going to be experienced the same process where I see three-step process. Number one, partnership formation. Number two is system integration and then the number three is commercial order. It is a much longer journey but has much bigger potential in that market. I think we have been enjoying one of the best advantage among other solid-state players in the U.S. with Mercedes, Stellantis, Hyundai, Kia. They’re already more than 25% of the global market outside of China.

And we just also onboarded a new JDA partner and that is from Europe as well. And I think we’re looking at a very significant part of the automotive market, even up to like 30, 40%. So this is something we think we have a great pipeline today. And we also have done vehicles across two continents in the U.S. and in Europe. We launched the first European solid-state battery vehicle last year with the record drive and also we launched the first vehicle in American soil with Stellantis. This year we had another recent announcement with Stellantis about Peugeot. So I think all three vehicles are really good starting point about the validation which is second stage.

We see it’s very important for them to have a tangible aha moment to say oh that actually works. And then I think we have to move towards the final stage of uptake and that’s where the fun things will start with all the manufacturing and partnership. And I think the recent announcements with SK On in this quarter is also very important. This is the second joint manufacturing partner we have announced this year and this definitely paved the way for the manufacturing capabilities with more than 200 gigawatt-hours globally in both U.S. and Europe. And I think the next stage is really to focus on the manufacturing and reduce the cost for manufacturing. That’s why the supply chain partnership matters a lot.

That’s why we had Mitsui Kinzoku, that’s one of the most reputable solid-state electrolyte suppliers in the world, join the partnership with POSCO Future M and Fuel Energy earlier this year to help us scale the all-solid-state battery manufacturing. I think it’s a really strong pipeline for us both aerospace and automotive market. We’re one of the very few companies actually have strong partnership both markets in the U.S.

Colin Rush (Analyst)

Great. Thanks so much you guys.

Brad Kray (Investor Relations)

Thank you Colin.

OPERATOR

Once again, if you would like to ask a question, please press star one on your telephone keypad. Our next question is from Mark Shuter with William Blair. Please proceed with your question.

Mark Shuter (Analyst)

Siyu and Richard, congrats on the quarter. We appreciate that business model that you talked about in the shareholder letter. And regarding your relationship with SK On, can you give us a little color on what shape do you expect this to take? Is this a licensing deal or joint venture or maybe just straight contract manufacturing? And is this more focused drones or EVs?

Siyu Huang (Chief Executive Officer)

Oh, that’s a brilliant question. Definitely. We’re a big fan of the fab-lite business model because we know this industry is bifurcating into the two segments. One is more on a designer and the other one is on a contract manufacturer. We know that it’s going to be very important to focus on the design especially the competition of the battery industry so fierce at this moment. When we see that for our automotive market there are two main ways of doing this manufacturing with partners.

One is called contract manufacturing which we recognize as our revenue and we work with our contract manufacturer to Produce the cell, which is something very similar to some of the semiconductor business. And the other way is we call it joint manufacturing. So it’s a combination of licensing on top of the material supply and manufacturing engineering services. And this is really tailored for certain customers, have certain manufacturing partners, have strong relationships with OEMs. Sometimes they are the daughter company, the wholly owned subsidiaries. I guess you can guess who they are out there.

And those are really the ones that were basically joint manufacturing with OEMs. So that’s where we think there is a fairly strong case that we can build licensing model. And when it comes to our own manufacturer, when it comes to the high spec market, such as for aerospace, we see that it’s a combination of our own manufacturing and contract manufacturing. First of all, the speed for this market is much faster. They don’t have much patience to wait for 3, 4 years to build a line, but they’d rather just pick up the cell, put it in the pack in a week and go. That’s the speed of this market. So I think with our own capabilities in Korea and in the US we do have some volume already.

We’re expanding those capabilities. As Richard just shared earlier in ’27 for the FAST product and ’28 for Solstice. I think for that market we’ll start with our own manufacturing because also the capital to put into those buildout is relatively small too. So we could relatively turn around manufacturing production lines much faster with relatively small capital and be able to ramp up in commercial order very quickly. But then the question is, do we have to do this forever? My answer is apparently no. And if there’s opportunity to leverage partners to build contract manufacturing capabilities, that will be definitely preferred. If we can use other people’s money, why not? This is also win-win for our contract manufacturers because a lot of them, they don’t want to be a cell maker or they don’t really have the technology to be the cell maker. So I think being able to leverage this and give them significant revenue at the same time, for us to be able to ramp up our revenue without putting substantial capital would definitely be a preferred way in the long term.

Mark Shuter (Analyst)

Thanks, Steve. That’s really helpful to dig in a little bit more on that fabless business model. Being able to easily convert lines for contract manufacturing or the joint manufacturing, that would be key. That’s why we’ve seen such strong success with silicon anodes, because it’s that drop-in replacement for graphite. The FEST system is flexible where you can either use silicon or it can be tailored for lithium as well or lithium metal. I mean with lithium metal requiring a bit more development in that commercial-scale equipment, can you give us some color on the differences between scaling those two?

Really, if you’re looking at a silicon anode versus lithium metal, either anode-less or not, and does that impact what chemistry you’ll commercialize first? And are the partners skewing one way or the other?

Siyu Huang (Chief Executive Officer)

Absolutely. You are definitely the chemist in the room. Very much appreciate this, Mark. I think yes, there is a difference for the silicon versus lithium metal. And even in our system, our existing FEST system with the lithium metal, we have up to 80% compatibility with traditional lithium-ion battery lines. And silicon potentially can have even more compatibility, which I think is even better when it comes to contract manufacturing. We have not yet disclosed our line expansion plan in detail. I would say for these two systems to some extent, as long as we manage the raw material to be compatible, there is a potential to have still like 80% compatibility. And one thing I also wanted to mention is that I think Derek asked the question earlier from the cell manufacturing. There are three steps: coating, assembly, formation. And yes, lithium does have a little bit of difference in the assembly, but the coating and formation are pretty much the same.

You can use the same equipment. So I think that’s something. And I would say there are also, of course, as you know, different types of lithium metal technology too. But at the end of the day, I think first of all, the coating, which is one of the most expensive parts of the manufacturing, should be quite commoditized and we could leverage it for our existing manufacturing capabilities. And I’m sure we’ll release more details as we’re moving along the next few weeks into the next quarter. I think there is even higher capability for the silicon ramp up. And I think for our aerospace market we’re likely going to be focused more on the lithium metal technology to begin with because that’s really the holy grail. And in the automotive market I think we see a combination of interest of both. So I would say like even between FAST and Solstice, there is interest for both silicon and lithium metal chemistry.

And since we haven’t shared more details, I would say it’s roughly about half and half in terms of our customer interest at this moment.

Mark Shuter (Analyst)

That’s very helpful, thanks, Siyu. Just one more if I can fit it in to touch on that last point. The demand for FIAC compliant cells, especially in the drone market, is high. And there’s a timing component where a cell today is very important and the performance of that cell may not even need to benchmark; it’s just because the availability of supply is so low. I’m wondering if there’s a trade-off or optimization of, okay, I can make silicon cells faster and easier today, but they’re not as good as the performance of a lithium metal or anode-less or solid-state.

But customers prefer cells today versus waiting two years. Have you seen anything like that in your engagement with customers?

Siyu Huang (Chief Executive Officer)

Yeah, that’s a great question. I think actually I don’t see much difference between the time to market for the non-FIAC supply chain for either silicon or lithium metal. For us specifically because we have one of the strongest partnership coalitions with POSCO Future M, which is one of the largest material makers in Korea and they are also the only one to produce both cathode and materials, and also a few other partners such as LG Chem over the years and even SungEel HiTech on the recycling side.

I think we have a really strong position in having access to one of the most advanced material supply chains globally. That’s why we also have been focused on innovating products ourselves internally. So this gave us almost the same time in developing NDAA-compliant cell for silicon versus for lithium metal. And I think I know what you’re asking here is more for a lithium metal supply chain. We do have a solution for that and I will be able to share with you hopefully by the next quarter.

Mark Shuter (Analyst)

Great, thank you very much.

Siyu Huang (Chief Executive Officer)

Thank you.

OPERATOR

Our next question is from Eric Goldstein with Water Tower Research. Please proceed with your question.

Eric Goldstein (Analyst)

Hey, good afternoon, guys, and congrats on all the accomplishments this quarter. I just had a couple of other questions. You put together a pretty impressive list of partners. I was just wondering how do you manage all the partners? Do you have employees that are co-located at their facilities? Are they co-located in your facilities and, where it makes sense, are you able to share advancements that are made with your partners across your entire ecosystem?

Siyu Huang (Chief Executive Officer)

That’s a great question, Eric. Thanks for dialing in today. Yes, our partnerships, especially with our customers and suppliers, have been growing constantly over the course of last few years. With Mercedes, Stellantis in early days, and Hyundai Kia, and even with VW’s recent onboarding, it’s definitely really strong. But I think we have had a very clear firewall on the technology and our trade secrets internally with our partners. And I think I would say all of our partners have been very respectful of our technology too.

So we haven’t really had to have the partner come in. Of course, when it comes to, say, automotive offtake, it’ll be a different story. You’ll have quality people getting to your room; that’ll be a different story. But I think at this stage, and also with our drone customers, they’re pretty hands off at this moment. And what we also realize is that usually when you have big OEMs or drone customers sitting in your room before you receive offtake, that means that something’s going wrong.

So I think fortunately we don’t have to have that issue. But I think we do have very close collaborations with our automotive partners. We actually had multiple interviews and even co-presentations in conferences, in press releases together. And I think a lot of people didn’t realize how closely the relationship is held with each other. And from earlier this year we announced the three partners across three continents—with Cooler in the US, that’s a US publicly listed company for drone and aerospace integration; with Tulip, as you know from the name, is from Netherlands; and JR from Korea. So those three companies across three continents, and just over the course of last few months with the world record we set with the Game of Thrones and even with partners with the Dial Part of Challenge and all these different competitions, those partners have helped a lot in this process. So sometimes we do visit their facilities and they also visit us, but I think it’s a very friendly conversation and we also keep a little bit healthy distance with each other.

Eric Goldstein (Analyst)

Okay, great. Just a couple others. The SK On MOU, are there any milestones that would turn that into a definitive agreement?

Siyu Huang (Chief Executive Officer)

Yeah, we actually have a lot of milestones within MOU. Apparently I don’t have authority to disclose it as of today, but I would say just from my perspective, from the company’s perspective, our next big milestone is really the offtake from OEM. I think that’s really the one that we’re looking into to build beyond those nitty gritty, small detailed milestones like we signed in an MOU. I think that’s going to be a big driver to bring everything back together.

Eric Goldstein (Analyst)

Okay, and then just one for Richard. It looks like the cash burn in the third quarter was a little higher than what it had been in the first half of the year. I’m just wondering how you’re thinking about the fourth quarter. Do you expect cash usage in the fourth quarter to be similar to the third quarter?

Richard Wei (Chief Financial Officer)

We provide guidance for the full year, about 36 to 38 range. That’s on a non-GAAP basis. I think you could deduce what the Q4 number should be. Based on that, we will continue to build inventory.

Eric Goldstein (Analyst)

Okay. And then just the last one, the $4 million legal judgment, was that paid out in the third quarter?

Richard Wei (Chief Financial Officer)

That was paid out in the fourth quarter.

Eric Goldstein (Analyst)

In the fourth quarter. Okay. Thank you.

OPERATOR

We have reached the end of the question and answer session. I would like to turn the floor back over to Siyu Huang for closing comments.

Siyu Huang (Chief Executive Officer)

Thank you all for joining us today and for your thoughtful. It means a great deal to me and to our team to share this journey with you. We look forward to updating you next quarter in the new year. If I don’t see you before the New Year, happy holidays and we’re grateful for your continued support of Factorial.

OPERATOR

Thank you. This concludes today’s teleconference. You may disconnect your lines at this time. Thanks for your participation.

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