Hello, everyone. Thank you for joining us and welcome to the SES AI second quarter earnings release and call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. I will now hand the conference over to Kyle Pilkington, Chief Legal Officer. Kyle, please go ahead.

Hello, everyone, and welcome to our conference call covering our second quarter 2026 results. Joining me today are Qi Chao Hu, founder and chief executive officer, and Ray Liu, 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 in 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. On this call, we will discuss non-GAAP financial measures as a supplement to our GAAP results. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles, but are intended to illustrate alternative measures of the company's operating performance that may be useful. These non-GAAP measures should not be considered an isolation or as a substitute for any gap measure, and our definitions may differ from those used by other companies reporting similarly titled measures. Reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measures can be found in our latest earnings release. With that, I'll pass it over to Chi Chow.

Thank you, Kyle. SES is solving two of the most difficult challenges in energy storage, accelerating product development using ai4 materials and building a robust supply chain to manufacture these products we originally focused on ev and pivoted more than a year ago to ess and drones applications in q2 we began seeing significant commercial milestones and we are very excited about the path we're on our q2 revenue grew by more than 40 compared to q2 last year and our gross margin improved from 18 percent to more than 22 percent due to our differentiated technology and robust supply chain and we are reaffirming our 2026 revenue guideline of 30 to 35 million on accelerating product development using ai4 materials we release molecular universe mu 3.0 our first agentic workflow platform that works for sodium chemistry as well as lithium chemistry and can be integrated with autonomous labs deploy fully secured and on-premise we shipped our first search in the box order to one of the world's largest battery manufacturers and some of the materials discovered by molecule universe have completed testing and entered pilot commercial deployment on building a robust supply chain to manufacture these products for For ESS, this is our largest revenue-generating unit. We're making great progress, especially in the US market. We were selected by Solark as a certified battery partner, and we brought on Paul Deemer, ex-CTO of FlexPower, to our board to help guide our ESS strategy. And we continue to hire a stellar team with background in leading AI data center total solution providers to execute and deliver our exciting ESS growth. For drones and unmanned systems, we are recruiting a team with a proven track record of selling to defense and commercial drones. We expect to start producing 1 million NDAA compliant sales per year in about one month at our career plant. And based on the strong customer demand we are seeing, we're looking at taking orders well into 2028. I'll dive into each topic separately. On ESS, while most competitors sell either pure hardware that don't have intelligent software or pure software that are not trained on real-world data, our HBox-enabled ESS systems are trained on the specific cells that we use in our hardware systems, allowing for one-to-one matching accurate state of health and safety management this prediction accuracy not only helps preventing fire and other incidents this is tremendous saving for our customers across residential commercial industrial and data centers one of the leading us-based fcc authorized inverter producers solar certified our subsidiary uses low voltage residential batteries for their hybrid inverter systems we believe this certification with SODARC will greatly accelerate the growth of UZ's revenue in the U.S., especially given the recent FCC restrictions around foreign-produced inverters and other electronics. We were also honored to bring on Paul Deemer to our board of directors. Paul served as the CTO of FlexPower, where he ran critical and embedded power group that was responsible for delivering power solutions to data centers and other industrial systems. Paul also ran new EV product architecture at Fort Warner. Paul's transition from EV to data centers is very similar to that of SES. On drones and unmanned systems, we expect to complete the scale-up of our career-based NDAA-compliant cell production from 200,000 cells a year to 1 million cells a year in about one month and we expect to start producing at 1 million cells a year full speed starting this q4 we have already hosted many of the largest american and allied drones makers for line audits with many more in the queue later this year we expect revenue contribution from ndaa compliant cells producing our career line to start in a meaningful way in q4 this year and really start to take off first half next year even at 1 million ndaa compliant pouch cells which we believe is one of the largest nda compliant pouch manufacturing capacities in the world and combined with our best in class energy density and performance we are looking at securing orders well into 2028 and we're also seeking additional nda compliant manufacturing capacities for both pouch and cylindrical cells to address the strong demand for these products these cells will be for drones but also broader on man and mobility applications we recently announced a framework agreement with deroni where we'll be responsible for designing and developing the complete battery pack for their h1x evito it's a really cool two-seater with molecular universe we release mu 3.0 this is most powerful and complete end-to-end workflow automation in energy storage we sold a search in the box module to one of the largest battery makers in the world and we are trialing full mu 3.0 workflow integrated with autonomous labs with many more we do have competitors for ai for materials but none offers solutions as complete accurate and most importantly secure as ours And many of our customers switch to MU after trying our competitors' offerings. Many of our competitors try to offer building blocks in a cloud-based toolkit, but product development is more than a toolkit, and very few enterprise customers would allow their proprietary data to leave their premises or be used to train external models. It requires a fully secured on-premise integration of domain expertise, experimental data, and computation chemistry simulation full stack. Some of the materials discovered by Molecular Universe have completed testing and entered revenue-generating early-stage commercial pilot development. We expect to release MU 4.0 later this year. It will feature ability to generate new molecules based on desired properties, and it will be integrated with Autonomous Labs, ALabs hardware, so users can generate or discover new molecules, synthesize them, validate them in full devices, and provide actual experimental data back to train their own foundation models, all fully secured on-premise. This flywheel connects simulation with experimental validation, can organize and generate high-quality data and trained models, fully secured and on-premise. And without humans in the loop, it can run much faster than humans ever can. I do think a lot of investors are underestimating molecular universe, especially purely through the lens of near-term monetization. But I believe in the next three to five years, Molecular Universe will power majority of product development, definitely in energy storage and expanding to complex fluids and eventually other material applications. The SES team is solving two of the most difficult challenges in energy storage, accelerating product development using AI for materials and building a robust supply chain to manufacture these products. We have a healthy cash runway, highly differentiated capability across products and manufacturing, and one of the most dedicated teams. I'm incredibly proud to work with our team on these critical challenges, even when the market may perhaps underestimate us. And I'd like to thank the team for their hard work. And now here's Ray for the financial updates.

Thank you, Chi Chow. I'll walk through our second quarter 2026 financial results. second quarter revenue was 5.1 million compared to 6.7 million in the first quarter of 2026 and 3.5 million in the second quarter of 2025. Notably this quarter validated our commercial momentum for the first time we saw revenue contribution across all product lines ess drone battery sales materials and molecular universe our gap growth margin was 22.6 percent in the quarter an improvement from 18.1 percent in the first quarter the improvement was particularly driven by the ess business where we saw a higher mix of international sales and continued pricing discipline turning to operating expenses our gap operating expenses for the second quarter were 20.3 million compared to 19.1 million in the first quarter the slight sequential increase was primarily due to a bad debt provision related to a legacy ev service contract year over year however However, operating expenses were down 26%, and we remain confident in our ability to sustain the expense reduction of more than 20% year over year. Our gap net loss for the second quarter was $17.8 million, or $0.05 loss per share, compared to a gap net loss of $12.1 million, or $0.04 loss per share in the first quarter. I want to remind everyone that our GAAP net loss can be impacted by non-cash mark-to-market movement in the fair value of our sponsor earn-out liabilities, which are required to be measured each reporting period under GAAP. In the first quarter, we recorded a 4.2 million non-cash gain related to these liabilities. That impact was significant in the second quarter. Excluding change in sponsor earn-out liabilities, stock-based compensation, depreciation and amortization, and including interest income. Our non-GAAP net loss for the second quarter was $13.1 million, or $0.04 loss per share, compared to a non-GAAP net loss of 11.1 million or 3 cents loss per share in the first quarter. The sequential widening in non-GAAP net loss was primarily due to lower revenue in the second quarter and the bad debt provision that I mentioned earlier. Looking ahead, we expect our net loss to narrow in the second half of the year, driven by a pickup in revenue and continued reductions in operating expenses as our cost reduction program takes full effect. Adjusted EBITDA for the second quarter was a loss of $14.6 million compared to a loss of $12.8 million in the first quarter. A detailed reconciliation of gap net loss to adjusted EBITDA and non-gap net loss is included in the financial tables at the end of the shareholder letter. Turning to capital allocation, we ended the second quarter with cash, cash equivalents, and short-term investments of approximately $163 million. Our CapEx-like business model remains a core financial discipline, and we're confident our current liquidity provides a wrong way to fund operations and execute on our 2026 growth initiatives. We're actively looking for inorganic growth opportunities, including M&A, that complement our strategy while maintaining financial discipline. We believe the second quarter demonstrates continued execution against the plan we laid out, broadening revenue contribution across all our products, continued gross margin improvement, and disciplined cost management. We are reaffirming our full year 2026 revenue guidance of 30 to 35 million as we look to the second half of the year our priorities are clear continue to scale energy storage systems and edge box distribution convert our drone qualification pipeline into commercial orders as the chenzhou ramp completes and close our supply agreement for materials discovered through molecular universe with that I will hand over to the operator.

We will now begin the question and answer session. To ask a question, please press star one to raise your hand. To withdraw your question, please press star one again. We ask that you do pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by now while we compile the Q&A roster. Your first question comes from the line of Winnie Dong with Deutsche Bank. Your line is open. Please go ahead.

Hi, thanks so much. I wanted to touch on the back half of this year. If you can remind us the mix of revenue that's going to be driven by across the different business lines. And then you can also talk about the backlog at the energy sentiment. It seems like you've got some important certifications that might be good for the USI. What kind of demand should we be looking at for 2027? And then I have a follow-up. Thanks.

In terms of the split, first half, it's basically majority ESS, almost more than 70% ESS. But in the second half we do expect drones and materials to pick up so still more than half from ESS and then in terms of that certification with SOLARC so basically if you're not certified then you're competing with like 20 other companies but once you are certified and there's only like like less than five that's like Enphase, there's Tesla, there's SOLARC then then really you're competing with like three so so um later half this year we expect a hockey stick to to uh start to pick up and then a lot more next year i think the exact number um we don't have the exact number yet but um we're quite excited to be certified by by soar because now we go from competing with 20 other players to now competing with just like emphase and tesla okay thank you that's helpful And then I was wondering, maybe just like on the capital allocation side, it seems like you're just sort of like sticking with that CapEx-like approach.

You do have, you know, 160-plus million cash runway. What kind of CapEx might you be looking to do, to spend it on? And then you also alluded to, you know, M&A. What are some of the pipelines that you're looking at locally? anticipate. I think if I look back to, you know, the capacity you have for your drone sales out of Korea, it seems like there is demand and order into 2028. So, like, would you need capacity expansion there and the use of CapEx for that? Thanks.

We definitely do. I mean, if we just have 1 million sales out of Korea, then literally we can only supply, like, at most three customers, customers, three drone customers that need NDA, like at most. So without additional capacity and based on this pipeline, we are looking at 2028. Now if we can double the capacity in Korea to 2 million or triple that or find additional NDA compliant capacity in Southeast Asia, so if we quadruple or even more that capacity, then all that pipeline that we were going to supply in 2028, now we can supply in 2027. So in terms of line, not so much this year, because most of that has already been spent. And then again, most of the career capex, we built that back in during the JDA with GM. So now it's not really building new capex, it is more modifying that. so not much this year and then later this year or next year if we're to invest in additional capex either through direct investment or through investing in jds or companies that that own those capex i think that's tbd but again for drones we're not talking about gigawatt hours scale we're talking about for example uh 20 megawatt hours 50 megawatt hours like way smaller than gigawatt hours. So I think the spending is a lot more efficient than the EV capex.

Thank you. And then what about the M&A portion? Any pipelines that you might be looking at, anything that we should sort of anticipate?

We are exploring. I think there are some companies that have interesting manufacturing capacities in Korea, in the drone space, in the ESS space, companies that make shell for drones or prismatic LFP. We're very interested in working with them, both cell companies as well as pack companies.

We're still evaluating some of those capacities. yeah we need internally with we set up some uh just want to add uh internal guard drills i'm doing mna so anything we want to do is going to fit into our strategy and also it's going to be uh business and revenue a creation to our business so we're just looking to to as the teacher was mentioning expand with the the cash we have on hand great thank you so much i'll pass one your next question comes from the line of dave storms with stone gate your line is open

please go ahead thank you for taking my questions um just wanted to maybe start with your comments around the expected gross margin improvement could you help us understand maybe what might be driving this is going to be uh continued from on pricing is this you know volume increases mix as you're moving into more drones in the back half just any further color here would be great Yeah, I can add some color.

I think the improvement, as I mentioned in the announcement, is primarily from our ESS business. That's mostly driven by kind of increased international sales. We typically, especially in the North America, we typically see a higher margin on the sales in North America. Additionally, we have maintained a price discipline on the ESS business, so that's contributed. I think back half of the year, I guess as a drone revenue picks up, we'll see margin increase because a drone sale typically carries a higher margin compared to the ESS business. So we'll see margin improvements in the second half.

Yeah, I think one of the key drivers to the gross margin, especially in ESS, is the price of the sales. And then nine months to a year ago, sales were really expensive, and we did not have edge box. So we were required to buy sales produced by one vendor out of one of their lines. So we have very little pricing leverage. And then since we have edge box, now we're able to source sales from multiple vendors and multiple lines because we're able to monitor and then balance between the sales. So that has reduced the price of sales.

That's great commentary. I really appreciate that. Maybe switching to the drones, you know, you mentioned that you are exploring beyond drones, you know, the broader unmanned and mobility applications.

You called out a new partnership there. maybe if you could spend a little bit time talking about maybe some of the technical challenges between drones versus the broader on-man ecosystem if there are any maybe how that market looks in terms of margins or demand or cam compared to your current market anything else there would be very helpful so a lot of the is just timing and then go to market investment and also timing And then we focus on drones because that market we have seen that it's consolidating around one, up to three major form factors. And so the sales we built, we definitely, first and foremost, sell to drones. Now, there are other applications that recently have surfaced, marine applications, boats, submarines, applications that also care about weight, NDA compliance, as well as some of the cargo planes, manned eVTOLs, as well as unmanned eVTOLs. So all the form factors that we have matured for drones applications, we're also selling those to the other adjacent markets.

That's great. Thank you very much.

Your next call comes from the line of Craig Irwin with Roth Capital. Your line is open. Please go ahead.

Good evening, and thank you for taking my questions. So I wanted to ask about Molecular Universe. Shishal, you're clearly excited about this as a longer-term opportunity and the potential for both revenue and IP out of the library that you've developed. Can you maybe talk about customer engagement? How actively are you marketing this to new customers at the moment? Do you have strong leads for additional new customers at the moment? If you could maybe give us a little color on the breadth of the customer interest. And how long do you think it will take as far as customers that are already looking for leads out of your database to make those commercial and have those revenue-generating opportunities?

So I would say we have about three customers, three battery companies that we are deeply engaged with. And then when I say deeply, I mean there's at least three to five teams within each company that are evaluating different parts of the molecular universe. There are ones, so the entry level, basically, ones that buy modules. For example, you mentioned search in a box. Some people buy predict in a box. Some people buy design in a box. Some buy ask in a box. Some buy formulate in a box. So that's the entry level. Companies buy these modules. Second level, companies will buy the entire workflow, ask, search, predict, design, manufacture. Basically, this entire workflow, and also with StarSeeker. So it's an agentic workflow. And then the third tier, companies that buy what we call mLabs. So mLabs is the integration of the entire agentic star seeker with autonomous labs. So we will actually combine the star seeker with corresponding autonomous labs. So for example, AsinSearch is integrated with a new molecule synthesis, A-Lab. formulate is integrated with with electrolyte alab design and predict are integrated with electrode optimization alab and also part of predict is integrated with cell testing alab so so before we had pure software pure software platforms installed on premise and instead of having this this pure software in the box delivered on premise now the software is delivered together with a lab so a a customer could just provide us 1000 to 1500 square meters of space and then we will lay out all the all the a labs and the corresponding software so so the on the customer side instead of needing 30 people 50 people to run this lab now you need just one PM, one project manager, with this entire software and this entire A-Lab together, M-Lab, and then you can have a complete battery workflow. So there are three major customers that we are, I would say, at the third-tier discussion. So hopefully we'll announce some revenues at the M-Lab level. And then beyond these three, there are also other battery companies, that we are in the module level and the workflow level.

Okay, excellent. I understood. My second question is about the cells coming online in Korea. So you're going from 200,000 cells a year in capacity to a million cells a year in capacity. And, you know, when I look at your current capacity of 200,000 cells, you know, that's quite small versus the needs of a lot of the defense suppliers, the drone producers and other companies that use lithium ion batteries in military equipment. But million cells, million cells a year sort of gets you in the game. Have you received any sort of soft commitments from these NDAA-constrained customers, the defense market customers, as far as probable orders or potential orders on that million sales a year? What's your confidence level that you'll see the offtake there? And actually, I guess another question is, is it possible we see revenue from the incremental capacity at the end of this current quarter? within the month of September?

Yeah, so total our pipeline for drones for just NDA, not counting the non-NDA, we're talking about 50-plus, just all NDA, and then the large customers, and we define large customers, are the ones that need about 200,000 to 300,000 NDA compliant sales a year. So we have maybe five large customers. So just the top five large customers, we've already exceeded 1 million. We're at like 1.5 million, right? And then 1 million is the capacity. If you're taking into account some quality, some down times, this and that, probably we deliver 700, 800 K. So yes, we are way under capacity purely in terms of NDA compliance. Now, we're doing two things. one is we are evaluating other capacities in korea either through our own investment or through country manufacturing so that we are hoping to double maybe triple the nda compliant capacity in korea and we're also looking at additional capacities in southeast asia this is one number Number two, the customers do have a range, a spectrum of NDA compliance. We have ones that want 100% NDA compliance, means cathode, anode, electrolyte, separator, pouch, and the entire assembly, everything must be done in Korea, completely NDA compliant. We also have customers that are okay with 40% NDA compliant, 50% NDA compliant. In some cases, Korea's own Article 1, Article 2 compliance, where you can have castle from Korea, house from Korea, but then sell assembly down in China just for one year. So we reserve the 1 million capacity in Korea purely for those that want 100% NDA compliant. And then we do have additional capacity for those that want maybe 40%, 50%, 60% NDA compliance. So we do have alternative capacities for those that don't want 100% NDA compliance, but some portion of NDA compliance, as well as we're looking for additional capacities in Korea and Southeast Asia.

Thank you for that. And my last question is, you know, you're increasing capacity or increasing your capacity commitment there fivefold. I do realize that you're using contract manufacturing, so probably you don't see as big a potential improvement in cost. But is there an improvement in cost that you can expect on this capacity increase? And, you know, the five customers that are very large in the drone market that you mentioned, you know, have they already started sampling cells given that, you know, you're going to be using nearly identical production, identical cell recipe to produce the commercial products?

So I just want to confirm that 1,100,000 NDA compliant cells out of Korea, those are entirely our own production. And then we have several other million, less than 100% NDA compliant. Those are through contract manufacturers. And then in terms of where we are with the customers, they've done sample testing multiple rounds. They've done a line audit one to two rounds. And then they're waiting for that one million sales capacity to be operational in September and then visit again for additional quality audits. And in terms of pricing, yes, going from $200,000 to $1 million would significantly reduce the price.

Excellent. Well, thank you for that, and thank you for the clarification. Congratulations on your progress. Well, thank you.

Your next question comes from the line of Mark Shooter with William Blair. Your line is open.

Please go ahead. hey chicho am i coming through yes we're here great thank you um on the ess business uh i'm interested in if you can update us and give us a little bit of color on exactly what niche of this segment you're looking to play in ideally and can you update us on if you are still in still trying to uh sell a product that is the full solution including you know the battery and the dms or edge box, or is there an opportunity to just sell the edge box to potentially a utility or an integrator?

Yeah, so I would divide them into three categories. One is it's just residential, and then there's new certification. So in residential, most companies buy batteries and inverters in one pack, right? Like people don't really just buy a battery or just buy an inverter. you find those two uh connected together so recently um when they when some of those foreign produced inverters got blocked that did also impact their uh co-sale co-marketing relationship for the battery suppliers because those two are sold a lot of times together and then this this partnership with with sorg sorg is one of the three uh along with emphase and tesla that that have us produced inverters so this will help the residential and then yes we do include the edge box there and then second is more larger scale data centers this is quite new for us this is not an area that uz was in uz was familiar with uh residential not so much in aidc so here we are trying to provide a total solution so the entire ups sometimes is the best together with the edge box this is also why we brought on paul to help us navigate the go to market strategy here and then third one um some of the the battery inverter distributors are open to us installing the edge box um and then we are testing with them um and then that may also pick up as a revenue source

uh helpful thank you now i'm talking about that second piece of the hyperscalers is there anything available or that you're ready to update us on that and give us a little bit more detail on the level of engagement yeah i think we can discuss uh and share more in q3 or q4 i think now a lot those are very early. Okay, I'm just going to try. Also in the shareholder letter, you mentioned that most competitors just sell hardware without software. The competitors, I'm thinking though, have very complex and sophisticated software programs attached. So who do you consider your key contenders in this space?

So I think some of the competitors that you're thinking of, they do, and the large ones, they do. I think for the majority, they either use like a third-party software or they use an internal software that's not specifically trained on those cells. So, for example, say the PAC system is using a 314 MPOW or LP prismatic produced Q1 this year out of the line uh from say catl or eve so our edge box will be trained on on that batch of cells like literally the exact batch of cells that go inside the pack and then if we switch to even a different vendor that makes the same 314 amp hour lp prismatic we will retrain the software So the software gets retrained on the specific cell, the specific vendor, the specific chemistry that we actually put inside the pack.

Okay, great. Thank you. I appreciate the color.

There appear to be no further questions at this time. This concludes today's call. Thank you for attending. You may now disconnect.