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spk02: 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. All lines will be needed during the presentation portion of the call and opportunity for questions and answers at the end. If you would like to ask a question, please press star one on your telephone keypad. I would now like to pass the conference over to our host, Eric Goldstein, Vice President of Investor Relations. Eric, please go ahead.
spk05: 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 Chi-Chao Hu, Founder and Chief Executive Officer, and Jing Nielis, Chief Financial Officer. We issued a press release just after 4 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. The risks and uncertainties that could cause our results to differ materially from our current expectations include but are not limited to those details 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 Chi-Chao. Thank you, Eric.
spk06: 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. Jim 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 remain 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, JDAs, with global carmakers, and we have three of them in total, one each with General Motors, Hyundai, and Honda. Moreover, we continue to have active dialogue with other OEMs that could potentially lead to additional JDAs. While we don't make any formal announcements, our batteries are being tested by many OEMs. We are working closely with all our partners to make further improvements to our battery technology, including improvements to performance under a variety of different temperatures and charging scenarios and to lower our manufacturing cost. Our product development efforts continue to be focused on a number of different areas. First, we need to develop and manufacture large format 50 and 100 amp power cells. We're working on this at Shanghai Giga and SDS 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 materials, electrolytes, and coatings to improve cycle life with periodic fast charge and safety of our batteries. We also continue to explore methods of recycling our batteries, particularly for mock lithium that are cost-effective. Our final KIGA facility has run back up after being down in April because of COVID-related shutdowns. We are producing and testing our 50 and 100 m power cells and sharing the data with our JDA partners. Additionally, our brand new facility in SCS 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-ion batteries are lighter in weight and particularly good at moving things. We believe there are quite attractive opportunities in verticals such as drones and eVTOLs. We are having discussions with a number of players in those areas and believe there are potentially some very attractive use cases. We hope to provide more details on these initiatives at Better World later this year, including a product demonstration. Finally, There are no changes to the milestones we outlined during our first quarter call in May. We remain confident that by mid-2023, we will, number one, deliver and optimize A samples for our three JDA partners. Number two, begin to transition from A samples to B samples. And number three, continue to establish supply chains for key materials. I will now pass the call to Jimmy Ellis, our CFO, who will take us through the financials.
spk00: Thank you, Chi-Chao. 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, increase in software development costs. related to Avatar, our advanced mind to man AI powered software to monitor battery health and 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 JDA partners, which was treated as contra R&D expenses. Our GMA expenses were $11.9 million for the second quarter of 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, an increase in costs related to external consulting, legal, audit, and accounting services. During the second quarter, we incurred a non-cash gain of $29 million associated with the change in fair value of the sponsor earn-out liability. As we outlined in our first quarter call, certain trenches of our sponsor earn-out shares are accounted for as a derivative liability measured as fair value based on the price of our common stock at the end of the quarter. For full year 2022, we continue to expect cash investment in operation to be in the range of $70 million and $80 million and change from our guidance last quarter. As we focused on a sample development with our OEM partners, increased production volume of our large 50 and 100 Empower cells and increased spending for the development of Avatar. Cap tax 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 and changed 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 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.
spk05: 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 sales are we making per day? And what kind of data are we sharing with our customers?
spk06: Well, current capacity, we have the capacity to make a few thousand of the 100 mp of cells per month. But currently, we're only making about 30 of the cells per day. And we intentionally do that gradually because we want to solve all the problems and then make sure we solve the problems at small scale and then not have a larger scale problem. And we have started collecting data, with slow charge, cycle life with fast charge, cycle life with periodic fast charge, high temperature, safety, beginning of life, end of life, different rates. And then we have started sharing those data with our JDA OEM partners. We also plan to publish some of these data later this year.
spk05: Great. Second question for Qiqiao. Can you talk in a little bit more detail about the development of Avatar? What are our internal developments focused on? And have we done much new hiring in this area?
spk06: 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 the 50 and the 100 end-power cells. And then we use these sensors to collect data. And we try to collect as many of the manufacturing defects as possible. And then second part is we're also building a model on the cell, both physics-based and machine learning-based model, so that we can actually use these data, the manufacturing data, as well as the performance data. And we use that to train the model. And the goal is to develop the ability to monitor state of health. And because we have much more data on the smaller cells, because we accumulated for many more years, and then we just started doing this for the larger cells, our current avatar is much more sophisticated for the smaller cell than it is for the larger cell. But that shows the potential for avatar for the larger cells. And then, yes, we have been hiring a lot in this area.
spk05: 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 for some of the things that we'll be spending on during the balance of this year?
spk00: Thanks, Eric. Yeah, so we will finish the build-out of our facility in SDS Korea, and it will be ready to use by the end of October for one of our JDA partners. In addition, we are planning to further expand this facility to support another one of our JDA partners. Also, we will continue to build Phase 2 of our Shanghai Giga and add additional manufacturing lines for us to serve multiple OEMs. and do our internal development work, as well as perform cell testing for Avatar out of our Shanghai facility.
spk05: Okay, thank you. Matt, I think we're now ready for Q&A. Can you please open the lines for questions?
spk02: Certainly. If you'd like to ask a question, please press star followed by 1 on your telephone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, press star one. As a reminder, if you're using a speakerphone, please remember to pick up your handset before asking your question. We will pause here briefly as questions are registered. The first question is from the line of Sean Severson with Water Tower Research. Your line is now open. Sean Severson, Water Tower Research, Water Tower Research, Water Tower Research, Water Tower Research, Water Tower Research, Water Tower Research, Water Tower Research, Water Tower Research, Water Tower Research, Water Tower Research, Water Tower Research, Water Tower Research, Water Tower Research, Water Tower Research,
spk03: Chi-Chao, my first question is regarding the Equation Reduction Act. I know there was some language in there regarding percentage of battery material value, you know, extracted in the U.S. or by a partner country, and also could be recycled as well. But just overall thoughts on that, how you're fitting into that, whether it's a positive or a negative for you.
spk06: Yeah, thanks. And we're still in the process of studying the details of the bill. But in general, it's a really exciting movement. So for us, liquid metal battery is our core. But also based on this core, we are building this ecosystem that consists of cathode, anode, electrolyte, separator, cell engineering, pack, algorithm, data collection, recycling. And then this incentive really motivates a lot of mature people companies in this space to partner with us even more. And we're overseeing a lot of our partners in Korea and in China now very excited about moving operations to North America. So this definitely further supports our goal to not just develop lithium-ion battery, but beyond lithium-ion battery, build this entire ecosystem and also sort of copy and paste the mature and highly efficient supply chain that currently exists in China, in Korea, in North America. Because at the end of the day, our lithium metal battery will be built using a lithium ion process. So we can actually leverage a lot of the very mature process. So it's a really exciting move.
spk03: Thanks. My next question is regarding applications outside of vehicles. I know you talked about drones and a couple others. In general, is that commercialization cycle shorter or longer than what you expect in the vehicle side? So in other words, to describe this process, would this move quickly relative to automotive and timeline, or are there some nuances to that that I'm missing here?
spk06: Sure. In general, we expect the non-EV applications like drones, delivery robots, these applications to definitely move faster than automotive. It's more fragmented, but definitely will happen faster. And then we are, for example, in our development for lithium metal, for example, if the cycle life is less than 300, we can definitely use that for drones and robots. And then if we catch more than 500, then that's for automotive. So we do have different thresholds. And while we improve and then get closer to meeting the automotive targets, we can definitely serve these other markets. And we are. And later this year, we will have a better world, our second better world, 2022. And then we do plan to do some demos in these other markets, especially drones.
spk03: Thanks. My last question, I'll jump back in the queue, is regarding the comment about, you know, your testing with additional OEMs. How long does that process take usually? I mean, when you say testing before you might announce, you know, announce another, you know, agreement or something like that. I mean, we're talking these are 12-month processes, 18-month processes. I'm just trying to understand the timeframe when you say testing with additional OEMs.
spk06: Yeah. Yeah, so the... Time frame, typically from, because now we have made a lot of progress with the three JDAs, so when we start with a new OEM, we don't start from the beginning. We start with a more established set of data. So typically it takes about a year, a year to 18 months. And then, of course, our primary goal is to turn one of our three A-sample JTAs into a B-sample. That's the priority. And then at the same time, we are developing a fourth, potentially fifth OEM JTA. Great. Thanks for that.
spk01: Thank you. Thank you for your question. There are currently no further questions registered. So as a reminder, if you start one on your telephone keypad, The next question is from the line of David Bell with Wolf Research. Your line is now open.
spk04: Hi, guys. Thanks for taking my question. I wanted to quickly ask, could you remind us again of the timeline 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 process cell facility, or would you be able to use your existing entire career to supply for the initial programs that you're targeting? Thank you.
spk06: Yeah. Thanks, David. The current plan is, so now we're in A sample, and then we are building these 50 and 100 m power cells. And then we expect to get to B sample next year. And the criteria is basically at the cell level, these 50 and 100 amp-hour cells need to meet the OEM targets for the A sample. There's energy density, cycle life with fast charge, rate, safety, high temperature, low temperature impedance, basically a complicated spider chart of specs. And then mid-next year, we expect to get a B sample. B sample, we will be building modules and packs with these cells and start testing some in a small number of vehicles. And then we expect that to take about a year, so until mid-2024. And then that's when we expect to get a C sample. C sample, we will test basically B sample but in more vehicles. dozens and even hundreds of vehicles. So our definition of commercialization is basically we've de-risked A sample and B sample. We've de-risked all the technology challenges, all the manufacturing challenges, all the supply chain challenges, and then we receive contract for B sample and commercial. And that's when we start to build manufacturing plants. Our current facility in Shanghai and Korea are only for A and B sample. They're too small for manufacturing facilities. So once we get a C sample and beyond, we will work with our OEM partners to identify a suitable location and build larger manufacturing sites. And so far it looks like that will very likely be in North America.
spk04: Okay. Thanks for that color. And just one additional question here 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 think about as a capital burden for you in the future, or is the investment going to be more from your partners? Thank you.
spk06: Yeah. Yeah. So we are working with a few partners and, and we disclosed publicly TNG Lithium is one of our largest shareholders, and Ivanhoe is also one of our largest shareholders. In addition to these two, we are working with a few other partners in lithium, and we expect to make announcements in a few months about collaboration and potentially a joint venture to scale up and lower the cost of this wide-format TNG lithium foil.
spk04: Okay, thanks. Thanks. Thanks, Tim.
spk02: Thank you. Thank you for your question. The next question is a follow-up from Sean Severson. Your line is now open. Thanks.
spk03: I have a question regarding our new spend and looking into the, you know, second half of 2022 and 2023. Can you give us some rough breakouts of where the spend is taking place, you know, being in Shanghai, 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.
spk00: I'll take that. Thanks, John. So our overall R&D spend, there are a few big baskets. One is headcount calls. So while we ramp up our pilot line facility and hiring more engineers and R&D, employees or headcount costs will grow globally. And that's happening in Shanghai, Korea, as well as US in all three locations. And then also, another big part of R&D expense is materials and lab related costs. So while we start to make more cells out of our Shanghai and Korea facility, we will be spending more money on the material cost to make the cells. And we are making a few hundred a month, but that number will grow over the course of this year and also next year once the phase two of Shanghai is up and running and then Korea expended. So I would expect the material cost to increase as well as part of the R&D expense. And then also on the software development, as we grow and then spending more cash on developing the software for Avatar and continue the testing work for the Avatar software, that area of spending also will increase. I don't have a specific number for 2023, but these are the... areas of spending that we expect to go up a little bit more in 2023 also the second half of this year great thank you that was very helpful thank you for your question there are no additional questions waiting at this time so i'll pass the conference over to the management team for any closing remarks
spk05: Yeah, thanks for joining in the call and look forward to speaking with everyone during the quarter.
spk00: Thank you. Thank you.
spk01: That concludes the conference call. Thank you for your participation. You may now disconnect your line.
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