SES AI Corp Q2 FY2023 Earnings Call

Good afternoon, everyone. I want to welcome you to the SES AI Corporation Second Quarter Earnings Call. My name is Rica, and I'll be moderating today's conference call. Now, I will turn it over to your host, Eric Goldstein, VP of Investor Relations. Eric, please proceed when you are ready.

Thank you, operator. Hello, everyone, and welcome to our conference call covering our second quarter 2023 results and financial guidance for 2023. Joining me today are Qichao Hu, Founder and Chief Executive Officer; and Jing Nealis, Chief Financial Officer. We issued our shareholder letter just after 4 p.m. today, which provides a business update as well as our financial results. You'll find a press release with a link to our shareholder letter 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 that 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 our actual or future results and performance to be materially different from those expressed or implied in these statements. The 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.

Thanks, Eric. As everyone, I'm sure, is aware by now, in 2021, we became the world's first company to enter automotive A-sample with lithium metal batteries. And we did so with three OEMs: GM, Honda, and Hyundai. Earlier this year, we laid out the goal to transition to B-sample, and I'm happy to report we are making really exciting progress. We continue to push forward with high-energy densities at a wide range of temperature and power requirements enabled by our unique lithium metal battery technology and Avatar system. Although we have a ways to go before full commercialization, we're getting closer to making the leap from automotive A-sample to being the first supplier of lithium batteries in the automotive B-sample stage. Furthermore, while we are doubling down on our progress with our automotive customers, we see another unique opportunity in Urban Air Mobility, UAM. That, I will discuss later in this call. In the EV market, we need to solve two major hurdles to position us to transition to automotive B-sample. The first is manufacturability. We're not talking about small cell lab-scale manufacturing. We're talking about 100 mPOWER sales in pilot scale manufacturing facilities for real automotive A- and B-sample qualifications. This year, we expect to transition from producing about 1,000 total 100-mPOWER lithium metal cells in 2022 to about 1,000 100-mPOWER lithium metal cells per month per line. Importantly, our cells are high quality and will continue to be tested both in-house and by our OEM customers. Now that we're more than halfway into 2023, we have lines in both Shanghai and South Korea making about 500 large 100-mPOWER lithium metal cells per month with one shift. By adding a second shift, we are confident that we will achieve over 1,000 cells per month per line. In addition to building the cells, we're also adding testing bunkers. We built one test bunker earlier this year. We expect to finish our second testing bunker before September and plan to add a few more bunkers in our facility so we can test as many cells as we can build. Providing a safe place to test a large quantity of our lithium metal cells is critical. This will allow us to accelerate our development process and test our cells under a massive universe of conditions so they are better prepared for real-world usage. These large 100-mPOWER lithium metal cells have been either tested directly by our customers or tested in-house and the data shared with our customers. Our second hurdle was B-sample line preparation. We announced Line 4 earlier this year, which will be dedicated to B-sample EV cells for one of our customers. We have completed the equipment process design and evaluation with our customer and have commenced a bidding process with a few vendors. We expect this line to be ready in Q1 of 2024. Line 4 will have more than 1,400 quality checkpoints compared to only 300 quality checkpoints in the first three A-sample lines and will be fully compatible with our Avatar system. We don't need to wait for Line 4 to be complete to start the actual B-sample phase since we expect that our current A-sample lines will soon be capable of producing nearly 1,000 lithium metal cells per month per line. We will use the A-sample lines in the early phase of B-sample and we'll move to Line 4 for the later part of B-sample after it's fully operational. Our world-leading energy density and power enabled by our lithium metal battery technology makes SES batteries a great fit not just for automotive applications, but also for Urban Air Mobility and drones. As such, in addition to Line 4, we're also preparing to build a new Line 5 which will be dedicated to B-sample for Urban Air mobility or UAM cells for another one of our OEM customers. We will leverage the equipment and process design from Line 4 and customize for UAM cells. Both Line 4 and Line 5 will have our latest quality control system with more than 1,400 quality checkpoints and be fully compatible with Avatar, allowing full traceability of our cells. We are super excited about both Line 4 and Line 5. Line 4 will be our first B-sample line for EV. Line 5 will supply cells for UAM and other drone applications that need lightweight and high-capacity lithium metal cells. In terms of performance, lithium metal is a perfect fit for UAM and drone applications because of its lightweight and high discharge power density. To review, we now have three A-sample lines operational. We expect to increase throughput from 1,000 100-mPOWER lithium metal cells per year last year to nearly 1,000 large 100-mPOWER lithium metal cells per month per line by the end of this year. And we're preparing two B-sample lines, one dedicated for EVs with one OEM customer, that's Line 4, and another dedicated for UAM with another OEM customer, that's Line 5. Both Line 4 and 5 are expected to start producing at least 1,000 high-quality, large 100-mPOWER lithium metal cells per month per line once operational, both fully compatible with Avatar and with full quality traceability. We expect to have all five lines, each producing at least 1,000 high-quality 100-mPOWER lithium metal cells per month. We believe that this will accelerate our B-sample development and qualification with our existing three OEM customers and open up additional capacity for a new pipeline of OEMs in both EVs and UAMs at the B-sample stage. In addition to preparation for B-sample, we're also investing heavily in fundamental R&D to accelerate our material discovery. For a novel battery technology like lithium metal, it fundamentally comes down to material, especially our core competence which is the electrolyte. I am proud to announce that we will be building a new electrolyte foundry near our headquarters in Boston. It will focus on novel electrolyte molecule discovery and synthetic pathway development. This novel material discovery platform will allow us to continue to improve our key performance and safety metrics by accelerating the design-to-data time frame for new electrolyte solvent and salt molecules and formulations. We are aggressively hiring top electrolyte scientists and chemists and AI/machine learning scientists to develop totally new molecules and synthesis techniques. Not only we are discovering new materials and new techniques, but we're also discovering new techniques to discover new techniques. With all these exciting developments, we need more talent. We recently added an SVP of Quality, Mr. Kojima Atsushi who has more than 30 years in quality management from Sanyo/Panasonic and GS Yuasa in nickel cadmium and lithium-ion batteries. He is managing our group level engineering and manufacturing quality to ensure our five large cell lines, three A-sample and two B-sample, incorporate the most rigorous quality system and are compatible with Avatar. Since lithium metal is new, and this is the first time anyone has taken lithium metal to A- and B-samples, we intentionally use more rigorous quality management than even the most rigorous lithium-ion lines. Under our new SVP of Quality, our yield actually decreased initially because the standards we're employing are much more stringent, and thus, we are discovering issues at a much deeper level. And that's a good thing. We want to systematically build a solid quality foundation, especially in B-sample. It's extremely important for our future. In summary, earlier this year, we established a milestone to transition to B-sample. Not only are we confident that we will achieve that, but we also expect to go beyond. We are expanding into UAM and drone applications, which, in addition to EVs, are ideal markets for our unique high-energy density and power density lithium metal battery. Not only do UAM and drones represent early commercialization opportunities for us, but we also believe that lithium metal will enable UAM in the same way that lithium-ion enabled portable electronics back in the 1990s. We're also expanding into novel techniques for material and process discovery using AI and machine learning. We are at an exciting intersection between sustainability, electric transportation, and AI and machine learning. We seek the world's best material scientists, chemists, cell engineers, and AI and machine learning scientists to join us. What started out as simply developing a novel battery has become much more, including enabling Urban Air Mobility and building a super intelligent system in both battery manufacturing and material discovery. With that, I will hand the call over to Jing.

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 2023. In the second quarter, our operating expenses were $19.3 million, up slightly from the same period last year. Stock-based compensation expense was $7.3 million in the quarter. We reported research and development expenses of $6.4 million, a reduction of approximately $0.8 million from the same period last year. This reduction primarily resulted from a higher recovery of our research and development expenses from our OEM customers, partially offset by an increase in personnel costs, mainly attributable to headcount growth as well as higher spending for lab consumables, material consumption, and related expenses in support of our ongoing battery cell development efforts. Our gross R&D spend in the second quarter was $14.7 million, which was partially offset by $8.3 million billed to our OEM customers, which are treated as counter R&D expenses. Our G&A expenses were $12.9 million, an increase of $1 million from the same period last year. This increase primarily resulted from higher personnel costs, mainly attributable to our growth in headcount as well as higher professional fees and audit-related fees to support our operations as a public company. These increases were partially offset by a decline in insurance expenses. Year-to-date, cash used in operations was $30.9 million. CapEx so far this year has been $7.8 million, primarily reflecting payment for equipment and facilities. Capital expenditures are expected to accelerate in the second half of the year as we finish the vendor selection process for Line 4 and Line 5 and formalize purchase orders. Looking at liquidity, our balance sheet remains very strong. We ended the second quarter with combined cash, cash equivalents, and marketable securities of $357 million. We continue to believe our liquidity is sufficient to get us to commercialization. At this time, our financial guidance for 2023 is unchanged. We are still guiding for an expected cash usage from operations in the range of $80 million to $100 million and for CapEx in the range of $50 million to $70 million. In total, we expect cash usage for the year in the range of $130 million to $170 million. We are currently trending toward the lower end of this range. Halfway through the year, we have made a lot of progress. As Qichao indicated, we are preparing for the transition to B-sample, and we'll be making investments in more advanced equipment for Line 4. In addition, we anticipate expanding into the UAM market with Line 5, providing another exciting growth opportunity for the company. We appreciate the excellent support from our shareholders, employees, and OEM customers. With that, I will hand the call back to Eric.

Thanks, Jing. Rica, let's open the lines for questions.

We have the first question from Shawn Severson of Water Tower Research.

Qichao, is there any difference in the battery itself and the technology between the drones and the unmanned aircraft and what you would be using for passenger vehicles?

Yes, there are differences. One is the cell dimension, which is why we have two separate lines, one for electric vehicles and another for unmanned aircraft. The cell dimension is the key difference, and we prefer not to switch the dies, as that would compromise quality. Additionally, for unmanned aircraft, the emphasis on energy density is significantly greater than for electric vehicles, while the focus on cycle life is relatively less. Therefore, the primary differences lie in the cell dimension and the design concerning overall performance and energy density balance.

So it's able to leverage all the same materials technology and chemistry effectively, it's just sort of how you're packaging these and, as you said, dimension?

Yes, the platform remains the same, as do the quality management systems. We have dedicated significant effort to enhancing our quality management, and the improvements we plan to implement in Line 4 will also be applied to Line 5.

It was really interesting to hear about the AI and materials development facility in Boston. From a broader strategic perspective, do you see this evolving into a place where you might create new molecules, develop new chemistries, and subsequently license and sell them? Or will the focus primarily be on advancing new battery technologies? I'm trying to grasp how this aligns with your overall strategy, as it appears to be a very exciting opportunity, but I wonder how this will ultimately drive revenue for you.

Yes, it's more focused on internal development. We will use this tool to create better materials, and it's unique to us. It's an exciting area, especially with Boston being a hub for life sciences, drug discovery, artificial intelligence, machine learning, and computer science talent from both universities and industry. That's why we've decided to establish this center. It will serve as an internal research and development capability to foster ongoing innovation. We aim to achieve C-sample status by 2025, marking our first generation, followed by subsequent generations. With each iteration, we plan to make continuous improvements, integrating our human scientists with the AI platform.

Can you clarify whether you are taking all the data and experience you have gathered so far and using it as a foundation, and then adding AI on top to explore different scenarios? I'm interested in understanding how this integration works, considering you already possess a significant amount of knowledge, technology, and are continuously gaining insights from the field regarding performance. How does the existing information and knowledge base fit in and adapt as you move forward?

Absolutely. So all the internal data will be an input to those. And then also, we want to have the machine to develop a new and also different understanding from the one that we humans have. And then this new understanding, we will use to search for new materials and then beyond the constraints that human scientists have.

I can confirm we've had no further questions registered. Since there are no additional questions, I would like to hand it back to the management team for any final remarks.

Yes. Okay. Thanks, Rica. We could end the call right here.

Thank you. The call has now completed. You may now disconnect your lines and have a lovely day.