SES AI Corp Q2 FY2022 Earnings Call

Good afternoon. Thank you for attending the SES AI Corporation Second Quarter Earnings Call. My name is Matt and I will be your moderator for today's call. [Operator Instructions] I would now like to pass the conference over to our host, Eric Goldstein, Vice President of Investor Relations. Eric, please go ahead.

Thank you. Hello, everyone and welcome to our conference call covering our second quarter 2022 results and outlook for the year. Joining me today are Qichao Hu, Founder and Chief Executive Officer; and Jing Nealis, Chief Financial Officer. We issued a press release just after 4:00 P.M. today detailing our financial results. You'll find the press release and today's conference call webcast in the Investor Relations section of our website at ses.ai. Before we get started, this is a reminder, the discussion today may contain forward-looking information or forward-looking statements within the meaning of applicable securities legislation. These statements are based on our predictions and expectations as of today. Such statements involve certain risks, assumptions and uncertainties which may cause the company's actual or future results and performance to be materially different from those expressed or implied in these statements. They're risks and uncertainties that could cause our results to differ materially from our current expectations include but are not limited to, those detailed in our latest earnings release and in our SEC filings. This afternoon, we will review our business as well as results for the quarter. With that, I'll pass it over to Qichao.

Thank you, Eric. Good afternoon, everyone and thanks for taking the time to join our call. Our second quarter performance was in line with our expectations and our liquidity is strong. We ended the quarter with over $400 million of cash on our balance sheet and continue to believe this will be sufficient funding to reach commercialization. Jing will provide more insight into our financials later in the call. It continues to be a very busy and exciting time for our company and the industry. Consumer interest in electric vehicles continues to grow as OEMs are introducing new models at an accelerating pace. Energy prices remained historically high and the charging infrastructure continues to expand. As a result, we believe the need for more energy-dense batteries that can improve range and reduce cost has never been greater and supports our belief that lithium metal is the next big thing in batteries. We remain the only next-gen lithium metal company to have any A-sample joint development agreements with global car makers. And we have 3 of them in total, one each with General Motors, Hyundai and Honda. Moreover, we continue to have active dialogues with other OEMs to potentially lead to additional joint development agreements. While we don't make any formal announcements, our beta products are being tested by many OEMs. We're working closely with all our partners to make further improvements to our battery technology, including performance under a variety of different temperatures and charging scenarios to lower our manufacturing costs. Our product development efforts continue to focus on a number of different areas. First, we need to develop and manufacture large format, 50 and 100 amp battery cells. We're working on this at Shanghai Giga and SES Korea. Over the next few quarters, our intention is to provide more details on manufacturing improvements, supply chain initiatives and data on the performance of our cells. Second, we continue to make advancements in the areas of material electrolytes and coatings to improve cycle life with periodic fast charging and safety. We also continue to explore methods of recycling our batteries, particularly for waste lithium that are cost-effective. Our Shanghai Giga facility has ramped back up after being down in April because of COVID-related shutdowns. We are producing and testing our 50 and 100 amp battery cells and sharing the data with our joint development agreement partners. Additionally, our brand-new facility in SES Korea is almost done. The structure of the building is complete and our manufacturing lines are being installed. We expect this facility to be ready for use by the end of the third quarter. We continue to pursue opportunities in other verticals in addition to automotive. Lithium batteries are lighter weight and particularly good at moving things. We believe there are attractive opportunities in verticals such as drones and eVitals. We are having discussions with a number of players in these areas and believe there are potentially attractive use cases. We hope to provide more details on these initiatives at Betterworks later this year, including our product demonstration. Finally, there are no changes to the milestones we outlined during our first quarter call in May. Please remain confident that by mid-2023, we will; number one, deliver and optimize A-samples for our 3 joint development agreement partners; number 2, begin to transition from A-samples to B-samples; and number 3, continue to establish supply chains for key materials. I will now pass the call to Jing Nealis, our CFO, who will take us through the financials.

Thank you, Qichao. Good afternoon, everyone. Today, I will cover our second quarter financial results and discuss our operating and capital budgets for full year 2022. In the second quarter, our operating expenses were $19.1 million, an increase of $12.5 million from the same period last year. Stock-based compensation expense was $5.5 million in the quarter. Our R&D expenses were $7.2 million for the second quarter of 2022, an increase of $3.7 million from the same period last year. This increase reflects higher personnel costs due to increased headcount to support our lithium metal battery development, which includes Hermes, our platform for new material development and Apollo, our engineering capability for large automotive cells, and increases in software development costs related to Avatar, our advanced AI-powered software to monitor battery health, along with an increase in lab consumables and material supplies. Our gross R&D spend in the quarter was $11.3 million, which was offset by $4.1 million reimbursable from our joint development agreement partners, treated as contra R&D expenses. Our G&A expenses were $11.9 million for the second quarter 2022, an increase of $8.8 million from the same period last year. This increase was primarily driven by higher personnel costs to support our operations as a public company, along with increased costs related to external consulting, legal, audit and accounting services. During the second quarter, we incurred a noncash gain of $29 million associated with the change in fair value of the sponsor RNO liability. As we outlined in our first quarter call, certain tranches of our sponsor RNO shares are accounted for as a derivative liability measured at fair value based on the price of our common stock at the end of the quarter. For the full year 2022, we continue to expect cash investment in operations to be in the range of $70 million and $80 million, unchanged from our guidance last quarter. As we focus on A-sample development with our OEM partners, increased production volume of our large 50 and 100 amp battery cells and increased spending for the development of Avatar. CapEx in the second quarter was $7.5 million, in line with our expectations entering the quarter. Capital investments during the quarter primarily went to the build-out of our facilities in Asia. We continue to expect total 2022 CapEx to be in the range of $25 million to $35 million, unchanged from our initial guidance which will continue to largely go towards our facilities in Asia. Looking at liquidity, our balance sheet remains strong. We ended the second quarter of 2022 with cash and cash equivalents of $405 million, which we believe is sufficient funding to get us to commercialization. Our second quarter cash used in operating activities and capital expenditures was approximately $20.8 million. For the full year 2022, we continue to expect our total use of cash to be between $95 million and $115 million, which should leave us with well over $300 million of liquidity entering 2023. With that, I will hand the call back to Eric.

Thanks, Jing. We’re going to start today’s Q&A with some questions that we’ve been receiving from investors. The first two are for Qichao. Qichao, what is the current status of our Shanghai facility? What is our current capacity? How many cells are we making per day? And what kind of data are we sharing with our customers?

Our current capacity, we have the capacity to make a few thousand 100 amp cells per month. But currently, we're only making about 30 cells per day. And we intentionally do that gradually because we want to solve all the problems at a small scale before scaling up, ensuring we do not face larger scale issues. We have started collecting data on cycle life with slow charge, cycle life with fast charge, cycle life with periodic fast charge, high-temperature safety, beginning of life, middle life, and end of life, along with various charging rates. We have started sharing that data with our JDA OEM partners and we also plan to publish some of this data later this year.

Great. Second question for Qichao. Can you talk in a little bit more detail about the development of Avatar? What are internal developments focused on? And have we done much new hiring in this area?

Sure. So it has two parts. One is the manufacturing data. We have installed sensors in the Shanghai line and also the Korea line. The lines for 50 and 100 amp cells are collecting data, allowing us to identify as many manufacturing defects as possible. The second part is we're also building a model on the cells, both physics-based and machine learning-based, allowing us to use this data for training the model. The goal is to develop the ability to monitor the state of health. Currently, our Avatar is much more sophisticated for the smaller cells than for the larger cells, but this shows the potential for Avatar for the larger cells. Yes, we have been hiring a lot in this area.

Okay, great. For Jing. Jing, our capital spending year-to-date has been $10 million and our new Korean facility will be ready to use by October. Can you give us a sense of some of the things that we'll be spending on during the balance of this year?

Thanks, Eric. Yes. So we'll finish the build-out of our facility in SES Korea, and it will be ready to use by the end of October for one of our joint development agreement partners. In addition, we are planning to further expand the facility to support another one of our JDA partners. We will continue to build Phase II of our Shanghai Giga and add additional manufacturing lines to serve multiple OEMs and conduct our internal development work as well as perform cell testing for Avatar out of our Shanghai facility.

Matt, I think we’re now ready for Q&A. Can you please open the lines for questions?

Qichao, my first question is regarding the equation Reduction Act. I know there was some language in there regarding percentage of battery material value extracted in the US or by a partner country and also to recycle as well. But just overall thoughts on that, how you’re fitting into that and whether it’s positive or negative for you?

Yes, thanks. We're still in the process of studying the details of the bill. But in general, it's a very exciting movement. So for us, lithium metal battery is our core, and based on this core, we are building an ecosystem that consists of CATL panel, electrolyte separator, cell engineering, pack algorithm, data collection, and recycling. This incentive motivates many mature companies in the space to partner with us even more. We are already seeing many of our partners in Korea and China are excited about moving operations to North America. This further supports our goal to develop not just lithium metal batteries, but to build this entire ecosystem and replicate the mature and highly efficient supply chain that currently exists in China and Korea in North America. Ultimately, our lithium metal battery will be built using lithium-ion processes, allowing us to leverage these very mature methods. So it's a really exciting move.

My next question is regarding applications outside of vehicles. I know you talked about drones and a couple of others. In general, is that commercialization cycle shorter or longer than what you expect in the vehicle side? So in other words, describe this process. Would this move quickly relative to automotive and timeline? Or are there some nuances to that that I’m missing?

Sure. In general, we expect non-EV applications, like drones and delivery robots, to move faster than automotive. Although it's a more fragmented market, it will definitely happen more quickly. For example, for our lithium metal development, if the cycle life is less than 300, we cannot use that for drones and robots. If we reach 500 cycles, then that's suitable for automotive. While we improve and get closer to meeting automotive targets, we can definitely serve these other markets as well. Later this year, we will have our second Betterworld in 2022 and we plan to do some demonstrations in the drone market.

My last question, I’ll jump back in the queue is regarding the comment about your testing with additional OEMs. How long does that process take usually? When you say you're testing before you might announce some other agreement or something like that, I mean are we talking about a 12-month process or an 18-month process? I’m just trying to understand the timeframe when you say testing with additional OEMs.

Yes. So the time frame typically is a year to 18 months. Now that we have made a lot of progress with our 3 JDAs, when we start with a new OEM, we begin with established data, rather than starting from scratch. Our primary goal is to turn one of our 3 A-sample JDAs into a B-sample first, while simultaneously developing a fourth and potentially fifth OEM JDA.

I wanted to quickly ask, could you remind us again of the time line and specific criteria of transitioning from A-sample to B-sample? And regarding commercialization, can you give us just a little bit more insight on what you need to see or when you will actually need to invest into a production cell facility? Or would you be able to use your existing Shanghai or Korea?

The current plan is we are now in A-sample, and we are building the 50 and 100 amp cells. We expect to transition to B-sample by mid-next year. The criteria for this transition is that these cells need to meet the OEM targets for A-sample in terms of energy density, cycle rate, safety, and high-temperature performance. By mid-next year, we expect to achieve B-sample status. This will involve building modules and packs with these cells and starting tests in a small number of vehicles. We anticipate that this process will take about a year, reaching C-sample testing until mid-2024. Our definition of commercialization involves de-risking A-sample and B-sample technology challenges, receiving contracts for B-sample, and only then do we start building manufacturing plants. Our current facilities in Shanghai and Korea are intended for A and B-sample work but are too small for larger scale production. Once we move to C-sample, we will work with our OEM partners to identify suitable locations for larger manufacturing sites, likely in North America.

Okay. And just one additional question on the supply chain. Is there anything that you could share with us on the scaling of the lithium metal anode? Is that something we should consider as a capital burden for you in the future or is the investment going to be more from your partners?

Yes. We are working with a few partners, and we publicly disclosed Tianqi Lithium as one of our largest shareholders, along with Ivanhoe. In addition to those, we are collaborating with other partners in lithium, and we expect to make announcements in a few months about collaborations and potentially a joint venture to scale up and lower the costs associated with lithium foil.

In a question regarding R&D spend and looking into the second half of 2022 and ‘23, can you give us some rough breakout of where the spend is taking place in Shanghai and Korea, manufacturing? And importantly, I guess, how or if that would change at all in your 2023 spend? I’m just trying to understand where the budget is today and where it will be going next year.

I'll take that. Thanks, Shawn. Our overall R&D spend consists of several key areas. One is headcount costs. As we ramp up our pilot line facility, our global headcount costs will rise, occurring in Shanghai, Korea, and the U.S. Another significant portion of R&D expense consists of materials and lab-related costs. As we start producing more cells out of Shanghai and Korea, we'll increase spending on the materials needed to make these cells. We are currently creating a few hundred cells a month, but this number will grow over the year and into next year as Phase II of Shanghai becomes operational and Korea expands. I expect material costs to rise as part of our R&D expenses. Additionally, we will increase spending in software development related to Avatar as our activities grow. I don’t have a specific number for '23, but these are the areas we expect spending to increase further in 2023 and also in the second half of this year.

There are no additional questions waiting at this time so I'll pass the conference over to the management team for any closing remarks.

Yes. Thanks for joining the call and I look forward to speaking with everyone during the quarter.

Thank you.

That concludes the conference call. Thank you for your participation. You may now disconnect your lines.