SES - NYSE

Good afternoon. Thank you for attending today's SES AI Corporation First Quarter Earnings Call. My name is Cole, 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. Please go ahead.

Thank you, operator. Hello, everyone, and welcome to our conference call covering our first quarter 2023 results and financial guidance. Joining me today are Qichao Hu, Founder and Chief Executive Officer; and Jing Nealis, Chief Financial Officer. We issued our shareholder letter just after 4:00 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 in 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. 2023 is starting out to be a great year for SES. A few years from now, when our lithium metal battery technology is in mass production, I think we will look back and say 2023 was a key turning point as we laid several crucial foundations. First, I'd like to give you an update on our 3 OEM JDAs. As we have discussed previously, we were the world's first lithium metal battery company to enter automotive A-sample JDAs, and we did so with GM, Hyundai and Honda. Our biggest value to them, in addition to deep material development capability, is the ability to build and test many large 100 mPOWER lithium metal cells. With this ability, our ideas become data and data become intelligence. Even Elon Musk tweeted after the Starship launch that high production rate solves many ills. It's been more than a year now since our 3 A-sample lines have been up and running, 1 in Shanghai, China and 2 in Chungcheongbuk-do, South Korea, producing and testing large 50 mPOWER and 100 mPOWER lithium metal cells. These are the most advanced and battle-tested large lithium metal cell production lines anywhere in the world. And what a difference they have made. They provide a safe and reliable platform for us to test new ideas and make improvements to the technology. It is safe to say, as we have discussed on previous calls, we simply didn't know what we didn't know until we started making these large cells in higher volumes. Many of the manufacturing issues that we detailed have now been solved or are close to being solved. For example, ultrathin lithium anode wrinkling and tearing during large-format rolling and lamination. After 3 rounds of iterations and improvements on our A-sample lines and in collaboration with our equipment and material vendors, we have significantly improved this issue. We have even started testing new processes for anode lamination and believe we will completely eliminate these issues in future designs. Second, novel electrolyzed solvent scale-up. While our material R&D team continues to develop new solvent molecules, our scale-up team has completed 4 different types of electric solvents for production. Third, electrical stacking misalignment and overhead. Our approach of manufacturing lithium metal cells using lithium-ion process really paid off here as our team of experienced lithium-ion engineers quickly addressed this issue by borrowing from their lithium-ion stack power cell experience. Fourth, powder formation during electrical punching. This is unique to our lithium metal anode, and we now have 2 teams working on laser and metal die approaches in parallel. Understanding the fundamental mechanism, we will be able to choose the best solution after fully understanding both approaches. Five, formation pressure and voltage stability. This is also unique to our lithium metal cells. And after 3 rounds of iteration and improvement and working with our vendor, we now have a solution that we will implement across our current equipment and future designs. Six, finding efficient ways to do image scanning on large-format cells and developing top ways to store, handle, test and recycle lithium metal cells. This is a really interesting and important area that many companies don't pay enough attention to. We are integrating imaging tools, including x-ray, CT, SCM, ultrasound and others to our manufacturing and Avatar systems. We're also developing new tools such as large 100 mPOWER lithium metal cell teardown robots, smart test boxes and very sophisticated large cell testing and stores monitoring facilities, all to provide a safe environment for us to innovate and test cutting-edge ideas on large 100 mPOWER lithium metal cells. And seventh, our large cell Avatar prediction accuracy increased from 0% to 60% last year. And in a recent experiment, our Avatar successfully predicted 18 out of 21 abnormal cells. That's getting pretty close to 90%. Furthermore, we significantly improved quality management through diligently working with our OEM partners. For example, our control plant went from about 200 control points to now more than 1,400 control points. We are targeting more than 4,000 control points. Since lithium metal is a new technology, and we want to fully characterize every little detail in the entire process, these issues could not have been addressed through simulation or discussion. They required extensive trial and error, and that's what our 3 A-sample lines did, building and testing hundreds to thousands of large 100 mPOWER lithium metal cells to perform a massive universe of experiments. I don't think any other lithium metal battery company is capable of doing this. And if you don't do this, you just can't push lithium metal forward. And we didn't stop there. These 3 A-sample lines are already the most advanced in the world for large 100 mPOWER lithium metal cell production. But we want to integrate all the learnings that we have accumulated and built a brand-new line, 1 that is a leapfrog, at least 1 generation ahead of our 3 A-sample lines. This is our Line 4. Line 4 will be for the next phase of automotive large 100 mPOWER lithium metal cell development, basically B-sample. Compared to the current 3 A-sample lines, Line 4 will have many of the new concepts, including Avatar integration and rigorous quality control plan built in from this design phase. The exterior facility build-out is already completed. We expect the dry rooms to be completed this summer and equipment to start arriving this fall and the entire Line 4 to achieve ready-to-use status in the first half of 2024. This will be a key enabler for us to transition to B-sample, which we're still on track to achieve this year. Lastly, I want to quickly address our stock price. Frankly, it's not something I think about every day. Recently, we had our 1-year anniversary since listing on the NYSE, and we completed 2 procedural filings. One was the S-3, which allows us to fundraise in the future, although we have no plans to fundraise anytime soon. Another was the Form 4, where management, including myself, recently reported the sale of shares purely to cover taxes on vested RSUs. I, as the founder of SES, have never sold a single share other than to pay taxes or made a single dollar from our stock since I started the company 11 years ago. I just wanted to clarify these 2 issues in case there have been any misinterpretations. Anyways, I'm super excited about the progress that we are making. It was painful last year but now it's fun again. And our new Line 4 will be a step change in our development road map and a major part of transition to B-samples. We will continue to keep you posted as we take additional steps to get Line 4 up and running. With that, I'll hand the call over to Jing to review our financials.

Thank you, Qichao. Good afternoon, everyone. Today, I will cover our first quarter financial results and discuss our operating and capital budget for full year 2023. In the first quarter, our operating expenses were $21.6 million, an increase of $2.4 million from the same period last year. Stock-based compensation expense was $6.5 million in the quarter. We reported research and development expenses of $8.5 million, an increase of $4.4 million from the same period last year. This increase reflects higher personnel costs due to increased headcount to support battery cell development, an increase in lab consumables and material supplies, an increase in development costs related to our advanced AI software and battery management systems and increased facility cost. Our gross R&D spend in the first quarter was $11.7 million, which was offset by $3.2 million billed to our OEM partners, which are treated as contra R&D expenses. Our G&A expenses were $13.1 million, a reduction of $2 million from the same period last year. This decline resulted from a decrease in transaction costs incurred as a result of the business combination during the first quarter of 2022, which was partly offset by an increase in personnel costs and professional fees to support our operations as a public company. During the first quarter, cash used in operations was $15.4 million. CapEx for the quarter was $6 million, reflecting payments for equipment and facilities. Looking at liquidity. Our balance sheet remains very strong. We ended the first quarter with combined cash, cash equivalents and investments in marketable securities of $373 million. We continue to believe our liquidity is sufficient to get us to commercialization. For 2023, our financial guidance is unchanged. We continue to expect cash usage from operations to be in the range of $80 million to $100 million and capital expenditures 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. This higher level of spending compared to 2022 is necessary to support our growth as we expect to transition from A-samples to B-samples in 2023. Significant areas of spending in 2023 continue to be for headcount, lab expansion, equipment, manufacturing facilities and materials. Lastly, SES became eligible to file an S-3 registration statement following the first anniversary of our business combination with Ivanhoe Capital Acquisition Corp. Our S-3 was filed with the SEC on April 25 and became effective on April 28, 2023. It includes a universal shelf registration, which will allow us the flexibility to raise capital from time to time up to an aggregate $300 million. While the headlines related to these type of filings can be confusing, to be very clear, we have no near-term plans to raise capital. 2023 is shaping up to be an exciting year of growth for SES. We appreciate the support of our shareholders, employees and OEM partners. With that, I'll hand the call back to Eric.

Thanks, Jing. Cole, you can now open the line for questions.

[Operator Instructions]. Our first question is from Shawn Severson with Water Tower Research.

Qichao, I wanted to touch a little bit on Line 4. You had mentioned in prior calls about bringing in-house a number of the manufacturing technologies, right? If you just -- there was some difficult, challenging stuff and you thought you guys could do it better yourself. I was just curious if you could lay out in Line 4 -- I assume those types of changes are being implemented and maybe help me understand a little bit of the things that are being done in that particular line versus the existing.

Yes, sure. Thanks, Shawn. So in the first 3 lines, essentially starting in Line 3, we started incorporating all the aspects, the cathode coating, anode coating in-house. But then it's still fragmented. And then we still don't have a very systematic way of collecting data for Avatar, also the number of control points. We started out with just 200 and then now 300. It's hard to add all these additional sensors and increase the number of control points from just 200, 300 to 1,400. So in Line 4, a couple of things. One is it will have every aspect, cathode coating, anode coating, anode lamination stacking. So Line 4 will be the first complete line in terms of us, our ability to make every aspect. And then also from the design phase of Line 4, we already incorporated these 1,400 control points. So whereas in the older Line 3, we had 200 and then we added in the fragmented way to 300. But in Line 4, from the beginning, it will have basically every aspect in-house. And then we're going to incorporate all the 1,400 control points from the beginning. And then all these sensors and the data will be compatible and then integrated with Avatar. So it's really a -- I would say at least 1 generation ahead of just the first 3 lines.

And from a manufacturability standpoint and a cost standpoint, are there any big-ticket items that are still in your sights to target cost reductions for as you go through B and, of course, eventually into C? Is there anything in particular you'd point to that is a great opportunity for further cost reductions that we should monitor?

Yes. So in the first 3 lines for A-sample, we -- the yield was always quite low, and the yield wasn't really a consideration for A-sample. Basically, A-sample is just let's build the cells, let's test the performance and then let's not worry about yield as much. So the cost is obviously not very meaningful because we don't have a rigorous way of controlling the yield. But this Line 4 and then B-sample later will be the first line that basically, in addition to all the performance, all the capabilities that we built based on the A-sample, Line 4 will be the first line that we will actually track yield. And then Line 4 will have significantly higher yield than the first 3 lines. So Line 4 will be the beginning where we actually move into a phase where we actually -- yield actually becomes a very meaningful consideration in addition to the performance and then -- and the other considerations from A-sample. So yield is a big consideration for lowering the cost.

Our next question is from Winnie Dong with Deutsche Bank.

My first question is also on Line 4. In the shareholder letter, it says that it would be critical to B-sample. And then that the equipment will start to arrive in the fall and then the line will be -- entirely be ready for use in the first half of 2024. But then it also seems like you're still on track to achieve the transition to B-sample this year. So I just wanted to confirm if the transition to B-sample is or is not dependent on Line 4 being fully ready. And also maybe an update on sort of like the latest time line for that transition.

Yes. So for example, back in 2021, when we entered into A-sample, we were -- so the definition of entering into A-sample or B-sample is basically starting the process of developing a B-sample. So Line 4 is going to be a key part of the process of developing B-sample. But we will enter into B-sample this year, second half of this year. And then Line 4 is part of that. So it's not like we only start B-sample after Line 4 is ready. No, we start B-sample and then part of the work of B-sample is getting this Line 4 ready. And there will likely be Line 5, Line 6, right, for the 3 OEMs. So Line 4 would likely be the first line in B-sample, but we will enter into B-sample second half of this year.

Got it. And to confirm, so far, you sort of indicated B-sample with one of the OEMs, is that correct? Or is there anything that changed in that regard?

Yes. I think we will enter into 1 first and then the other 2 will come later. But from a technical perspective, the requirements are quite similar, and then the capability that we've built and the capability that we increased by having Line 4, that will be transferable across all the 3 OEMs.

Got it. And if I can sneak just one more in, this is more of a theoretical question. I guess if we fast forward to, let's say, 2026, in an ideal world with everything sort of like going to plan, understand that it might not, right, most likely, you finish B-sample by end of 2024, and if B-sample takes maybe another 12 months or so sort of to finish, what would ideally have taken place by that in 2026? Would it be a plant with a JV ideally up and running? Or do you start the build-out of that plant in the U.S.? I'm just trying to get an idea of sort of your internal road map, even with the understanding that it's not set in stone.

Yes, sure. So we enter to B-sample second half of this year and then '24, next year, towards end of B and beginning of C, that's when we basically sit down with the 3 OEM partners. And also potentially, they are large-scale battery manufacturer partners. And then sit down and plan location and resource for C and SOP. So A and B are sort of similar and then considered together and the pilot scale plant. But once you get to C and then start planning for C, then you also plan for SOP. So I would say towards end of B -- so now we are transitioning to B. Next, when -- say, a year to 18 months from now, when we are transitioning to C, that's when we plan the North American site for lithium metal battery manufacturing as well as supply chain.

Our next question is from Timothy Johnson.

In the past -- recent past, you mentioned some work being done on the anode-free concept. Can you please update us on where you stand with that?

Sorry, can you ask the question again? The recent work on the anode and the what, the second half?

On the anode-free where you take out the lithium foil and all of the lithium for the anode comes from the cathode upon charging.

Yes, yes. So on anode-free design, it's one of the next-gen projects that we are exploring. So all the lines that were used in the 100 mPOWER cell lines, the 3 lines for A-sample and then on Line 4, all these can be used for anode-free as well. And so we are actively building and also testing anode-free version of this 100 mPOWER lithium metal cells. So when I say 100 mPOWER lithium metal cells, they come in different versions, anode-free version as well as lithium version. So we do have the capability to test these. And then perhaps later this year, we can disclose more data. For now, the anode-free version of 100 mPOWER lithium metal cell, we primarily are considering these for drones and eVTOL, the urban air mobility applications, less so for the EV applications.

Our next question is from Dennis Hugh. I'm not sure if Dennis has disconnected or not, but there are no additional questions waiting, so I'll pass the conference over to the management team for any closing remarks.

Yes. I think this past quarter and just the first quarter after 2022 -- 2022, last year, was when we first built these large 100 mPOWER lithium metal cells. And then people thought it was a big leap and crazy to build these large lithium metal cells. And then it was really difficult. And we felt we were crazy, too, last year. But now, this quarter, this year, things have turned around. And then a lot of things that we learned now finally, things are coming together. Line 4 is really the first time that we take all the learnings that we have from A-sample JDA and then putting them together, all the capabilities, all the knowledge, all the -- and the new ideas. And then turned new ideas into data, and the data into intelligence. So we're really excited about 2023 and just the future capability. I mean also on Line 4, you imagine a year from now, we are on Line 7, right, the first line for C-sample. And I just think -- I'm just really excited about the progress and then just can't wait to share more good news with you guys.