Factorial Energy Inc. (FACWW) Q2 2026 Earnings Call Transcript

Greetings. Welcome to the Factorial Second Quarter 2026 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to Rodney Nassia, Investor Relations. Thank you, Rodney. You may begin.

Thank you, and good afternoon. With me today are Dr. C. Yu Huang, co-founder and chief executive officer, and Richard Wei, chief financial officer. Earlier today, we published our second quarter shareholder letter on the investor section of our website at factorialenergy.com. The company uses its website to disclose material, non-public information, and to comply with its disclosure obligations under SEC Regulation FD. Investors are encouraged to monitor the site and sign up for email alerts. Today's discussion contains forward-looking statements within the meaning of applicable securities law, including statements regarding industry trends, future performance, manufacturing capabilities, business plans, and milestones. Actual results may differ in a material way. Please review to the risk factors described in the quarterly report on Form 10-Q for the quarter ended June 30, 2026, filed today. And in our registration statement on Form S-4, 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 general accepted accounting principles. We define non-GAAP operating expenses as GAAP operating expenses excluding depreciation and amortization, non-cash lease expenses, and stock-based compensation, all of which can be found on our consolidated statement of cash flows. Management uses these measures to plan and evaluate the cash cost 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 today's press release and posted on the Investors section of our website. I will now turn it over to CU.

Thank you, Rodney. Good afternoon, everyone, and welcome to our inaugural earnings call as a public company. Eight weeks ago, our team ran the NASDAQ opening bell. That moment belonged to the people who spent the past decade building this technology and to the partners who believed in it early. Today, I wanted to show you what we have done with that trust. For those new to Factorial, our June 30 shareholder letter laid out who we are and our commercialization road mapping detail. Today, I will update you on our recent investment at our company and head on two important topics I hear most often from investors and from people across our industry. The first topic is, when will solid-state batteries produce revenue? The second is, how does an American battery company win in an industry whose production base is overwhelmingly concentrated in Asia? I'll discuss both within the context of our long-held strategy and our recent achievements. Now, beginning with the first topic. Moore's Law, if you were applied to batteries, is not every two years. It is closer to every 20. And lithium-ion, after three decades of development, is now approaching practical limits on energy density and safety. We spent the past 10 years building technology designed to move beyond those limits. At the simplistic level, a traditional battery runs on liquid inside, and if you push for more energy, that liquid can become the limiting factor on safety and performance. Solid state technology replaces all or a portion of the liquid with a solid, making the system more stable and allowing performance beyond the reach of liquid-only systems. platforms. Our commercialization efforts primarily focus on two proprietary platforms, together protected by more than 150 patents and patent applications. Fest is our high power platform and built for flexibility, pairing a polymer with a liquid component. Solstice, our all solid-state platform, contains no liquid at all and takes us one step further, adding benefits for space and robotics that require high thermal stability and safety. Beyond the two platforms, our cell designs extend to full-liquid, advanced electrolyte systems, where customer requirements call for extreme high energy and high power performance. It is a range we can move across as demand evolves in the high-spec markets we serve. From the beginning, our strategy has been sequenced. High-spec markets such as aerospace, space, robotics, and supercars is our near-term revenue focus, where performance is decisive and adoption cycles are shorter. Automotive is our mid-term opportunity. At longer term, we see significant opportunities in data center and energy storage. In recent months, we began converting that strategy into commercial momentum. In May, we announced partnerships with leading drone battery integrators across three continents, including Cooler Technology Group in the U.S., Tulip Tech in Europe, and GRES in South Korea. We showcased that work at Exponential Conference in Detroit. At that stage, these were only early relationships and engineering programs. In July, these relationships began producing results. Customer drone flight tests with Tulip demonstrated more than a 30% increase in flight range using our solid-state and lithium-metal battery technology. And that was achieved before any engineering optimization. Last year, our cells powered a drive of more than 1,200 kilometers on a single charge on public roads. This year, the same platform performed in the air on the customer's aircraft, on the strength of the drone flight test. Factorio and TULIP established a commercialization framework covering joint customer engagement and a pathway towards volume production. In July, we also reached a major milestone, our first commercial battery order from a separate leading US drone manufacturer, moving us towards commercial deployment in aerospace. A flight test demonstrates what the technology can do. A commercial order demonstrates that a customer values it. We expect this to be the first of additional orders in the aerospace and market, and we see it as an early step in building the foundational energy layer that will underpin our near-term revenue objectives. Moving from partnership announcements to commercial order within a few months reflects years of preparation. Our intent is to repeat the pattern in markets beyond aerospace, validate in the field, formalize the partnership, and earn the order. Now to the second topic, how Factorial can win as an American battery company? Our answer has three parts. The first is performance. We're focused on producing the highest quality solid state batteries for the most demanding applications. We deliver technology that lithium mine cannot reach in ad markets where performance determines outcomes. In this market, the customer's need depends on range, payload, and endurance. Energy density sets the ceiling on all three. The second is capital-like scalability. Our fast platform is compatible with up to 80% of existing lithium-ion manufacturing equipment. We design it that way deliberately so our partners can adopt our technology using the industry's installed manufacturing base rather than building new infrastructure. And so we can scale through partner capacity rather than our own capital. Our recent announced Memorandum of Understanding with SKON, one of Korea's top global battery manufacturers, reflects this strategy in action. Together, we're evaluating how our solid-state technologies can be manufactured at scale using SKON's existing global manufacturing network. Identify cell manufacturing partners is a critical step ahead of any significant production program. SK-ON is our second manufacturing-focused partnership with the global battery producer, which expands our optionality, and we will continue to work with others across the industry. The third element is our strategic alignment with U.S. supply chain priorities. We're headquartered in Boston with manufacturing in the United States and South Korea and partners with deep roots in the U.S. national security community, U.S. policy is moving towards securing battery supply chains, particularly for drones and aerospace platforms, and our footprint and partnerships align directly with that direction. Putting it all together, we do not believe this industry's winner-take-all. Asian manufacturers account for virtually all global battery cell production today, creating a significant opportunity for differentiated suppliers serving the U.S. and European markets. We intend to be one of them. Before I hand the call to Richard, I'll head on to additional items from this quarter. In June, working with Stellantis, we achieved the first automotive integration of solid-state battery technology in North America. Our fast cells are in a Dodge Charger Daytona development vehicle. The integration required a patented new mechanical pack architecture that Stellantis designed specifically to accommodate solid-state cells. We believe this is the first solid-state battery vehicle running on American soil, and it makes Factorial the first solid-state battery maker to achieve successful vehicle integration with two top 10 global OEMs. The Mercedes-Drive demonstrated performance at a high end, the Stellantis program integration creates a platform to reach a larger share of the market. Our announced automotive partnerships represented 26% of the 4.4 million EVs sold in the U.S. and Europe in 2024, in a market projected to exceed $200 billion by 2030. Following the close of our business combination, we were also honored to welcome Dieter Zetcher, former chairman of Daimler AG and the head of Mercedes-Benz Cars, to our board of directors. His experience guiding vehicle programs from concept to production has already been invaluable to us. I will close my section by connecting the pieces. In drones, we have shown our playbook coming together end-to-end, from platform partnerships to technology demonstration to commercial orders within months. That same playbook is already underway in mobility, with drone product synergy between the two. A demonstration vehicle on the road today serves the same purpose as a drone flight test, providing real-world proof of performance that bodes towards commercial orders. The much larger mobility market simply moves on a longer timeline. The broader picture supports both passes. According to IEA and McKinsey estimates, global battery demand is projected to grow roughly fivefold by 2030 to five terawatt hours. Much of the fastest-growing demand comes from machines that must carry their own energy, including drones, autonomous flights, vehicles, and robots. We have spent a decade preparing for this environment. I will now turn the call to Richard to walk through our financial framework and outlook.

Thank you, CU, and good afternoon, everyone. We entered this next phase with a strong capital position and disciplined approach to how we deploy it. I will provide an overview of our financial framework and outlook. It has three parts, our capital light model, our capital resources, and how we track our progress. First, our capital light model. We recorded operating expenses of $13 million for the second quarter and $19.5 million for the first half of 2026. For the sixth month ended June 30, 2026, our non-GAAP operating expenses, which excluded certain non-cash operating expenses, were $14.5 million, dollars, with spending directed primarily at R&D and the operational infrastructure behind the milestones CU described. For the same six-month period, capital expenditures were $0.6 million. These results were in line with our expectations. For the full year of 2026, we expect non-GAAP operating expenses of approximately $40 million. We also expect capital expenditures of approximately $13 million. To put those figures into context, $13 million of annual capex is a small fraction of what a battery scale-up has historically required. That is by design, and it reflects our capital-like strategy. This capital spending is our own investments, primarily directed at expanding our own fabrication lines to support production for our FEST and SOSES programs. We expect this FEST expansion to be completed by the end of 2027 and the SOSES expansion to be completed by the end of 2028. Beyond those lines, we do not intend to fund large-scale capacity on our own balance sheets. As demand scales, we plan to deploy capital prudently as we grow through manufacturing partners who contribute production capacity while we contribute intellectual property, key materials, and engineering support. Second, our strength in capital positions, As of June 30th, 2026, cash and cash equivalents were approximately $112.8 million, largely reflecting the proceeds of our business combination and related pipe transaction to fund our current operating plan. Our spending is calibrated so that the capital we hold today carries us through the milestones that matter. Third, tracking our progress. We believe an important measure of our progress is energy density, as we have mentioned during today's call. It is the single largest driver of range, payload, and endurance in every market we serve, making it a direct indicator of how our technology is advancing. It is especially relevant to our drone programs, which are our nearest-term path to revenue, and where higher energy density translates directly into longer flight range and enhanced functionality. Our platform has demonstrated 390 watt-hours per kilogram in sales delivered to customers and has been validated in real-world testing, both on the road and in the air. Within our drone programs, we expect to reach approximately 450 watt-hours per kilogram by year-end, with continued improvement targeted for next year. For context, typical production lithium-ion cells today deliver 250 to 330 watt-hours per kilogram. So 450 represents meaningfully more energy in the same weight, and that is what extends flight time and payload. With this foundation in place, we expect to achieve our first commercial revenue in 2027, generated from the high-spec markets we serve. Our first commercial order from Aerospace announced in July and the first commercial order from the supercar announced this January are leading indicators of that path. For a next-generation battery company, crossing from validated technology to commercial revenue is a critical milestone, and we believe we are positioned to reach it ahead of others in our industry. In summary, our framework rests on disciplined spending, a strong capital position, and a measurable indicator of advancement. We look forward to updating you on our progress. I will now turn the call back to CU.

Thank you, Richard. Ten years ago, we started this company on a conviction that the world would need fundamentally better batteries, and that delivering them would help define the next era of mobility and intelligence. This year, that conviction produced a flight test, a partnership, and a first commercial order. Our next milestone is first commercial revenue. There is a great deal of work ahead, and our team is eager to do it. Humanity deserves better batteries, and delivering them is our mission.

Operator, more ready for questions. Thank you.

We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the queue. You may press star 2 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 Cancer First Journal. Please go ahead.

Hi, this is Drew Norquist on for Derek. Thank you guys for taking the questions and congrats on the first quarter call.

Just wondering if you can go into more detail on the first drone order and specifically on size of the order and how much of it will be satisfied with third-party manufactured sales or if that's going to impact the margin on that order thank you thank you for the question you know due to customer confidential reasons we're not able to get into the details as you know a lot of our customers we really prefer to be low profile and so I can't get into that, but we're really excited to have a real commercial order for the drone business.

And at that point, we've also got our first commercial, we're looking at to get our first commercial revenue in 2027, right?

So this order is really the leading indicator of that path, which is the breakthrough for factorial to have this potential revenue coming up in 2027 all right thank you and then i have a follow-up on he said the initial customer flight test for the drones demonstrated a 30 increase in flight range and that was achieved before any engineering optimization can you give any sort of size again in terms of how much more room there is to improve that once you know sort of implement engineering optimization?

Right. So this is the similar chemistry that we have shipped to Mercedes for the B sample. And at that time, we disclosed that this is around 390 Wh per kilogram energy density. And we do have this ambitious target, as Richard just mentioned, to move towards like potentially 450 Wh per kilogram towards the end of the year. So I would say that's where the selling of lithium-ion batteries is really the floor for solid-state and lithium-ion-metal batteries. There is definitely a lot of room to improve.

All right. Thank you, guys. Thank you, Drew. Our next question is from Colleen Rush with Oppenheimer. Please go ahead.

Thanks so much, guys. you know can you talk a little bit about the the development of pack technology and and how that's supplementing some of the the cell technology or leveraging the cell technology that that you guys have developed and really getting it ready for larger applications yeah that's a great question i think um for us we have been very focused on the cell technology development uh in the last few years, you know, it's difficult and challenging enough to be a cell maker.

And I would say we decided to work closely with our partners for pack manufacturing in the near term because a lot of them are already there, and it's great that we formed the partnership with the three leading pack integrators, the pack makers, across three continents earlier this year with Cooler, Tulip, and JR. And I think they not only have a great technology to integrate our cells, but also have great networks to help us distribute our cells to the global customers. And when it comes to technology, some of our cells require very minimal change to what the lithium-ion battery pack technology has today. and some companies they just trip rapid and send it into the air that's why we're talking about minimum engineering efforts but of course there are definitely ways to engineer it in a more sophisticated matter which will increase the performance and eventually we'll be able to have a potentially broader utilization for the technology as well excellent and then you know can you just give us a sense of you know where you're at from a yield perspective on the cell manufacturing

and how the cadence of improvement is progressing and how I should think about that through year-end.

Yeah, so we started the production about two, three years ago for our fast technology, and we started with a yield of like 10%. And after a few months, we were able to ramp it up to like 60%, 70%, and it actually gets 85% of the yield. I would say that performance for a line with like tens of megawatt-hour scales is already quite impressive. We've heard similar numbers from leading established lithium-ion battery makers that typically if you have a gigafactory, you could get to like 95% yield for a gigafactory, but for a line with like sub-gigawatt-hour capacity, usually 70% to 80%. It's already state of art. So by achieving 85% yield, it shows that we not only are able to achieve high consistency and high performance for the cell, but at the same time, we're able to have much lower cost than some of the other players in the market that are running below like 30% yield, which is quite advantage to the point that actually our manufacturing process is highly compatible with the lithium mine, we don't have to recreate a wheel while we're doing manufacturing.

Excellent. Thanks so much, guys.

Thank you, Colin.

Once again, if you would like to ask a question, please press star 1 on your telephone keypad.

We have reached the end of the question and answer session.

I would like to turn the floor back over to CU1 for closing comments.

Great. Thank you. And thank you all for the questions and for joining our first earnings call. This results call is about updating you on our technology and commercial progress. We hope you found it insightful. And we look forward to updating you in coming quarters. And we thank you all for the confidence in Factorial.

This concludes today's teleconference. You may disconnect your lines at this time.

Thank you for your participation.