SES AI Corp
NYSE:SES
Earnings Call Analysis
Summary
Q3-2023
SES, poised to sign a landmark joint development agreement, is nearing a historic milestone with the development of a safe, high energy lithium metal automotive battery, surmounting challenges in both energy density and safety. Capitalizing on breakthroughs in materials and engineering, SES has significantly enhanced the safety of traditionally risky high nickel cathode batteries without compromising on other key performance metrics. Financially, the company is wisely managing its strong cash position, projecting $85 to $105 million in total cash usage for 2023, consisting of $65 to $75 million in operational expenses and $20 to $30 million for capital expenditures. These prudent investments support the commercialization roadmap and maintain SES's technology leadership in the competitive battery industry.
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Hello, everyone, and welcome to the SES AI Corporation Third Quarter Earnings Conference Call. My name is Bruno and I'll be operating your call today. During the presentation, you can register to ask a question by pressing star followed by an elephant. I will now hand over to your host, Eric Goldstein, Vice President of Investor Relations. Please go ahead.
Thank you, operator. Hello, everyone, and welcome to our conference call covering our third quarter 2023 results and financial guidance for 2023. Joining me today are Qichao Hu, Founder and Chief Executive Officer; and Jane Nealis, Chief Financial Officer. We issued our shareholder letter earlier this morning, 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, the Investor Relations section of our website at ss.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 actions include but are not limited to, those detailed in our latest earnings release and in our SEC filings. This morning, we will review our business as well as results for the quarter. With that, I will pass it over to Qichao.
Thanks, Eric. Earlier this year, we laid out the goal to transition to B samples, and I'm happy to report we're almost there. We expect to sign a sample joint development agreement, JDA, with 1 of our OEM customers in the next few weeks. This will be the world's first automotive fee sample for lithium metal. This will be a historic milestone for SES for the battery industry and for the future of transportation. We had to overcome monumental challenges to get to this point. One of the most important challenges was safety. And we're not talking about lab-scale safety. We are talking about practical real-world safety in the battery industry, there's an inherent trade-off between energy density and safety. Many companies improve by using safer chemistries, such as lithium iron phosphate, LFP, capital or solid-state electrolytes. LFP is indeed safer than high nickel capitals. And in theory, Selestat appears to be less volatile than little -- so why don't we switch to the safer chemistries? While these safer chemistries appear to improve safety, we believe that makes unacceptable compromises to energy density manufacturability and other important parameters. For example, an LSP that has about half the energy density of a high metal capital. and Solid State has yet to prove its manufacturability and performance in a cell that can actually be used in a real-world application. So what's the point? We don't want ourselves to be impractical but safe. We want ourselves to be alive, powerful and safe. Our goal all along has been to improve safety without any compromises to other parameters. We start with a high energy density approach that has inherently higher safety risk than a lower energy density solution. And we make it safe. It's extremely difficult, but we have always chosen to do things the hard way. That is what we will have achieved to qualify for automotive sample for lithium metal. Norman saw listened with a high nickel case would achieve the level of practical safety that we recently demonstrated in our internal testing. This was a combination of very exciting fundamental breakthroughs in materials and engineering.
Given events with MIL with a high nickel cathode can have severe safety risks. -- and we believe our advancements address the safety issues in both vision and Lineal. For example, Our new high active materials have the same capacity of equivalent traditional high nickel cathodes, but are much more stable. Our new and treatment process allows the same capital to pass rigorous safety tests, including no penetration and heating. As new power cell engineering with a self-venting mechanism that allows gradual safety relief of energy during thermal runaway. A new electrolyte but safer with no compromise on performance, a newly protected lithium aloanode and the new charging protocol that improves overall safety. These are fundamental breakthroughs in both engineering and materials, not just for lithium metal, but also for lithium ion, especially our developments in the compact -- we are now able to delay the thermal runaway on-site temperature and reduced peak temperature and pressure during thermal runaway, significantly. Some companies that are in earlier stage of literal development talk about dreams of perfectly safe batteries.
In most cases, the better capacity or an intensity is so low that it's useless. -- to be in automotive sample, which we believe is the most advanced in widenet development anywhere in the world, we deal with tactical safety concerns, not doing some paper. It's accelerating to see our batteries during safety tests going from big explosions to small explosions to big fires to small fires to just spoke -- it feels like business in a successful Rocke launch after many failures. We recently completed our second testing bunker. Now we have even greater resource to test new things. For many people, risk means danger and should be avoided. For us, risk means innovation, and we embrace risk by creating a safe environment to test on safe things.
Without these bunkers without this safety environment to test on safe fans, we will not be able to understand the mechanism. We will not be able to make unsafe. -- and next-generation batteries and transportation will not be able to move forward. At our upcoming Better World 2023 in December, we will demonstrate some exciting videos of high-energy density lithium metal batteries testing very rigorous safety case. We never thought we could achieve such safety while maintaining higher energy density. This is a big milestone towards our goal of commercializing large capacity high-energy density looking cells for automotive applications. In terms of manufacturability, -- last quarter, we indicated we will increase our A sample lines to 1,000 large capacity 100 npower cells per line per month from approximately $500 per month. November will be the first month that we will attempt to build 1, 8 100-nocells at our tintyline in Korea. These cells will be used for both internal testing and OEM sample qualification and Avatar safety prediction algorithm training.
We currently have 3 A sample lines in operation and 2 decent lines on the preparation, 1 line for an EV application and 1 for a UAM application. For the 2 sample lines, we are in the final stages of completing our vendor qualification review. We expect to continue to use the A sample lines for sample cell development until the new sample lines become operational, which we expect to occur in 2024. By running our lines up to 1,000 large 100 power cells per month -- we will also gain valuable experience in Avatar cell triabilixy and policy system development. We have even hired a dedicated data collection team to help ensure that the data are correct and collected through the correct process -- this team helps our algorithm safety prediction tremendously by providing verifiable and complete data.
In summary, earlier this year, we established a milestone to transition to sample and we are almost there. This is a major milestone for us and for the battery and transportation industry and is a result of solid fundamental hard core material chemistry and cell engineering breakthroughs in safety, for high energy density lithium metal batteries with a high iCapital. -- from sample to B sample JDAs with EV OEMs. The most important value of these JDAs is helping us build a solid foundation in technology development, process development engineering development, policy development and manufacturing development. With this solid foundation, we are now able to expand into other applications that are ideal for our unique high energy density and high power density within metal batteries such as drones and urban air mobility QAM. These applications also represent early-stage commercialization opportunities for us.
We are very excited about the UAM opportunity and believe that lithium metal will enable UAM in the 2020s, the same way that lithium-ion enabled portable consumer electronics 3 years ago in the 1990s. The world's first lithium B-sample will be a small step for SES, but has the potential to be a giant milestone for the future of sustainable transportation. -- both on land and in air.
Now I'll hand the call over to Jing.
Thank you, Qichao. Good afternoon, everyone. Today, I will cover our third quarter financial results. and discuss our operating and capital budgets for full year 2023. In the third quarter, our operating expenses were $19.4 million, down slightly from the same period last year. Stock-based compensation expense was $2.4 million in the quarter. We reported research and development expenses of $8.5 million, up $0.1 million from the same period last year. Our gross R&D spending in the third quarter was $11.4 million, which includes $2.9 million that was built to our OEM customers and is treated as contra R&D expense. Our G&A expenses were $10.9 million, down $2.4 million from the same period last year. This decline was primarily driven by lower insurance premiums and lower marketing, accounting and audit-related expenses.
Through the first 9 months of 2023, cash used in operations was $43.9 million, and capital expenditures were $12.3 million. Importantly, our balance sheet remains very strong. We ended the third quarter with combined cash, cash equivalents and marketable securities of $342 million. We continue to believe our liquidity is sufficient to reach commercialization.
Our updated guidance for cash usage in 2023 is now $85 million to $105 million. This is comprised of cash usage from operations of $65 million to $75 million and for capital expenditures in the range of $20 million to $30 million. We continue to be very prudent with our cash. We have a very practical process to evaluate where we should spend our cash. In order to execute on our business point and drive our commercialization road map forward, while we keep investing in core material innovation with the goal to always stay ahead of competition. As Qichao mentioned, we're in the final stages of completing our vendor qualification review for Line 4 and Line 5 in preparation for. We expect the bulk of our capital expenditures for Line 4 and Line 5 to the first half of calendar year 2024. We're making significant progress and remain on track for transition to B samples by the end of this year.
Our strong liquidity position allows us to continue investing in our next-generation manufacturing lines to support our OEM customers while continuing to innovate at the forefront of battery material science and to attract and retain top talent. We are very thankful for all the support we have received from our OEM customers and shareholders. With that, I will hand the call back to Eric.
Thanks, Jing. Bruno, let's open the line for questions. .
[Operator Instructions]
Our first question comes from Winnie Dong from DB.
I was wondering if you can describe sort of how the next month of work will look like in the in the context of transitioning to sample. What are some of the key data points or transition to look forward within the next few months heading into 2024 as you're preparing Line 4 and 5.
Yes, that's a good question. So from a contractual perspective, basically, we're going through the standard legal and the financial process to getting the documents signed. And then from a practical work perspective, so 1 key thing that we have demonstrated is safety has a Level 5. And then we've already demonstrated 5 at a small cell level. in the next few months, we need to further verify has Level 5 at larger cell level. So the safety is a key thing.
And then A sample was really about demonstrating the chemistry and the cell design and then now sample. In we are going to build about 5 to 10 cars worth of batteries. So now safety and the practical safety actually becomes really important. So they want to see a very detailed testing under a very detailed testing parameters. And then both at the small cell level and also the large sale capacity level. And also, we are also in the process of completing vendor qualification so that we can start building the line for Sample. So will likely take about a year, 2, 1.5 years. So complete by end of 2024 to mid-2025.
Got it. And then earlier on this year, I think you guys have spoken about talent acquisition as 1 of the key initiatives this year. I was wondering for the year almost ending. Are you where you hope to be or need to be with your sort of like composition?
It's a talent -- I mean, we always want more and better. And we're never satisfied with talent acquisition and the market is very competitive, which is a good thing. I mean, it's a really exciting market. And then -- and you can probably tell the kind of people that we're trying to hire battery engineers, material scientists, AI scientists, these are very much in demand, almost around the world.
So I'm sure we can always do better -- but actually, recently, we actually made some pretty impressive hires. For example, on the material science side, we hired our team, is 1 of the world's most renowned experts in battery electrolyte and also with -- on the cell engineering side, we also hired -- we also made a few hires recently. And then -- and these guys have extensive experience from the big Korean battery companies actually recently, we made quite a bit of progress. And then that allows us to beef up our team for the B sample and also to expand to Vito.
So we gently have -- so in the past, we have 3 teams for the 3 A-samples. And now we're going to keep beefing up our team to go from A to B and also expand into. So we're making good progress, but never enough.
And then maybe a more high-level question just in the context of like recent narratives around the adoption curve that may be not coming as strong as expected, you sort of get that from suppliers and you hear that from OEMs. Understanding that you guys were sort of in the product development phase, but do you hear any of this from your end of JDA partners in terms of the adoption curve looking for not coming as strong or you think any color on pattern.
Yes. I think I mean the adoption curves can always be impacted by, for example, the economy and the other factors. But the overall trend that's unstoppable. And then especially these OEMs like GM and Honda which, I would say, are behind the newcomers like the Tesla and no, they are very much committed to EV adoption. So there might be some impact by the economy and other factors. But in terms of the battery road maps, no change there. Thank you so much your question -- thank you. .
Our next question comes from Shawn Severson from Water Tower Research.
I was wondering if you could talk a little bit about the air mobility space. And I'm trying to understand, I guess, lack of a better word, the synergies between the automotive and transportation side and what you're doing in Air Mobility and then extending from that a little bit of the time line of what we'd be looking at in the urban air mobility space.
Yes, Sean, that's a really interesting question. So all the work that we are doing with the EV OEMs in A-sample and B-sample, building up the line, improving the quality, improving the cell design, the safety, the performance. Almost all of that get transferred to the EBIT because need all the parameters that the EV OEMs require. The safety actually even more rigorous safety requirements, the cell design, the quality, they need all of that. And then what's better is that for the OEMs you have -- I mean even though the EV OEMs are very committed to lithium-metal, do you still have the incumbents like LG, CATL, Samsung, SK, the big companies that are very much invested in the EV space. whereas for is blue ocean. And then some of the bigger companies are less interested in the EBT because they think the near-term market is smaller. but then for us, for next-gen batteries, it's really exciting, for example, say 1 Evita is about 2 cars in terms of batteries, right? So in the EV sample, we built 10 cars water batteries. That's just the B-sample for EV. But 10 cars worth of batteries, that's by Etos worth of batteries. If we supply 5 vitals worth of batteries to the likes of JV Archer, the retail companies, then that actually consider commercial. And the volume is smaller, but then the margin, the economics are much more favorable. And also, it's a new market. So the standards have not been set. And then we have the opportunity being the first mover in lithium metal for Evita. We have the opportunity to sell the standards. And once you set the standards, then the FAA or Europe, yes. Then they will adopt the standards. Then our litigator could be the first FAA certified within metal battery for UR. And then once we set the standards, then we influence the next 10 years of certification process in this field. So the impact is really big. .
That's very interesting. And would you be able to assume through this process, get a lot of data, right, a lot of operating data that would apply back transportation. Is that correct?
Absolutely, absolutely. And then I mean, we love working with the EV companies, but then those companies tend to be bigger, right? And then the EV companies are more entrepreneurial and more like similar size. And we work together and we share data, And we also tune our business model to fit what the market wants. So it's actually a really exciting market and is actually happening much faster than we expect. I mean next year, the summer Olympics, 1 company will do a demonstration plant. And then several cities around the world are do you need to have this demonstrations. So it's actually happening much faster. .
And my last question is we've -- we've had the supply chain shift in place for several quarters now in terms of pushing towards domestic supply, right, and qualifying for Iran. What's the progress report there? Have you seen things materially changed. I know you have some special relationships in your supply chain. But are you seeing that this move is being made. And as far as your strategic outlook, you feel very comfortable that you've got everything that you need at this point. going forward.
Yes. Yes. So very good point. And then, for example, on the animal side, and then I'll just at a conference with Applied Materials. So Applied Materials, live and these U.S.-based lithium companies are building up plants in the U.S. Some of them are in North Carolina, some are in other states as part of the IRA initiative. And then going forward, we definitely plan to purchase and qualify from U.S.-based vendors -- and then also in terms of lithium salt, we are working with a few partners to potentially set up facilities also in the U.S.
So we can produce this salt for our high concentration solvent installed the electrolyte. And so the anode and the salt are 2 really key parameters to us. And then also several of our capital vendors are already setting our plans. For example, in Canada, North America to supply the capital. And then once we are towards the later stage of sample, then we will sit down with our EV OEMs and potential EBITA OEMs to discuss where in North America to set up a plant for the battery cells.
Our next question comes from Jeff Graham from Alliance Global Partners.
A question on the transition to be samples with the auto OEMs. Is there a way to assess how far behind. It sounds like you have kind of 1 kind of a front runner that you're very close with. Is there a way to assess kind of how far out the other 2 are relative to the first one? And is having one, assuming you get across the finish line, getting 1 to be sample, does that kind of give you guys an ability to nudge the others since there's some third-party validation? Or is that not really relevant as you guys have, as you guys see OEM seeing it.
Yes. Good question. So actually, the spec transition from ATB for all the 3 OEMs and actually all OEMs around the world. I should quite similar the performance and the safety. So work in transition to be with 1 of them because the testing and the type of studies and testing that we've done is the most extensive. And I would say the other 2 probably in terms of the gap, probably can be measured in months, just different OEMs.
In the past, a year to 2 years during the sample development process, we had different time lines because we had different focus in the facilities, for a line setup, but the progress is different. But then I would say the overall platform, the core technical progress that we make for safety and performance, that's very transferable. And different OEMs may have different internal processes for getting to the next phase. But also they're measured in months. But -- that's more on the contract level. But in terms of core technical progress, we made progress with 1 OEM, and then we get to B-sample. And that progress can be transferable to the other OEMs.
Great. That's very helpful. And for my follow-up, more of a macro question for you guys. But obviously, there's been some articles in the industry talk about some slowing EV sales and some building of inventories. I think a lot of that relates to cost as well as maybe some range in it, which are obviously things you guys can address pretty impactfully. So I'm wondering if you guys are maybe seeing any different level of urgency from your JDA partners to move a solution like years forward? Or is it pretty similar from what you guys have seen historically?
Yes. So the OEMs have sort of modified their focus, remember from range anxiety to maybe safety to maybe cost -- but then in terms of technology platform, the OEMs have not really changed their commitment because, for example, lithium metal, it came in 1 range. But then it can also mean lower cost because a longer-range battery, if you keep the range the same, then the battery is actually smaller.
So you attack the packaging can be actually cheaper. So lithium metal can actually be designed so that it can mean longer range or lower cost to fit the OEMs target.
[Operator Instructions] Our next question comes from Timothy Johnson, Dometic
Yes. My question concerns the lithium metal anode. There are many processes for making such an anode. They're all problematic to 1 extent or another. Can you please elaborate a little bit more on the process that you use to lay down your lipometal anode and whether or not you have any major problems with this going forward. I'm also interested in the composite coating that you're putting on the lithium metal anode. You mentioned today that you've got a new coating material -- and I'm wondering if you can elaborate on that.
Thank you very much Yes. So also cover the landscape. The first 1 in terms of how you put lithium foil down as the node. There's about 3 main techniques for putting down within foil. And then 1 is execution, as you take the site looking for and then excluded like a pasta maker extruded or thinner oil and then you laminate onto your turn collector. And then another physical deposition basically inside the chamber, you vapor a lithium and then that falls on to your substrate. And then third is reporting. You can take the powder, you make a slurry and then you coat it and then you drive off the solvent. And there's pros and cons to each of the technique. I would say the most mature currently is the extrusion in the elimination. That's by far the most mature process for putting down silicon oil. And there are disadvantages to that, for example, it's hard to make the foil wide, but we have an internal process for making the foil wide. And then that's why we're able to make the large format 100 empower look and metal cells. And then the other is in the extrusion and the mission process for now. But we are actively testing the other 2 approaches because the 2 approaches may offer long-term advantages over the extrusion and lamination process. And for example, maybe in a year to 18 months, we might switch to the other processes? And will keep the industry updated?
So -- and for us, the different process basically comes down to which 1 gives the best metrics in terms of cost, manufacturing efficiency and performance. And then your second question about composite coating. So the composite coating serves 2 purposes. One is to improve safety, secondly, to improve the cycle life and we can't really get into the details of exactly what material we use. And the industry has different types of coatings and there's different ways and different places in the cell that you can put on the coatings. So -- so I can really get into the details, but it's basically used to improve safety and then prevent internal and also to improve cycle line.
Our next question comes from my -- so from -- it's a private investor.
My question is -- so previously, you have mentioned that a sample JD includes different cathode chemistry in addition to high nickel. Has any progress been made in other chemistry other than Inc, such as LFP lithium metal.
Yes. So actually, in a sample, we tested both high nickel, FP and also mixtures of those -- and then in center we will continue to test these different capitals. And the reason that we do that is another were in B-sample, and then we need to finalize the cell design. But the final output of B sample is basically, we have to finalize the cell design. And 1 of which is what cathode we're going to use. And then these different caters will have different points on the spider chart in terms of safety, cycle life and cost. And this may vary for the different types of vehicles, even within the same OEM, many OEMs will have, for example, the premium brand and the economy brand. And then, of course, they would wish to have 1 standard unified cell with a unified cathode, but that's not likely. So -- so we are actively testing high nickel and the different types of high nickel, LFP, different versions of LP and the mixtures of those 2. And of course, there are different ways of mix in dose. And we evaluate at the end of the day, the performance and density and overall set of parameters.
So during the battery world, do you plan to share the data on other chemistries other than lithium metal No. So all the data will be for lithium metal. The cathode may come from a combination of high nickel and LFP, but they're all lithium metal. We don't make any other calls. We'll make with the metal.
Okay. So related to line 4 and 5. Line 4 and 5 are designed for B samples since EVO has a lower volume, but can Line 5 be used for commercialization for Evoke?
Exactly. Very good question. And I think Sean from Wallet asked the same question. So Line 4 and 5 are very similar. Line 4 is for EV, but then it's 10 cars of batteries a year, and that's considered B sample for Line 5, we can make 10 cars or 5 AV tools worth of batteries per year. But that's considered commercial because in EV, no OEM will give you an order for 10 cars, right? But in, a lot of the EV companies will happily give you an order for 3 aircraft or 5 aircraft, and these are very high margin. And this helped help us set the standards in the industry. Clear Line 5 will be for much -- so if that's the case, will there be the sample line just for Ivor Line 5 is more like the sample and SOP for yes. Yes. So EVT OEMs don't really divide the phases as clearly as the EV OEMs. So BC SOP are sort of mixed together.
We currently have no further questions. So I would like to hand the call back to the management team for closing remarks. Over to you.
Yes. So thanks, everyone, for tuning in and also supporting us. And it's not been easy for us to get to this point, and we're very close to entering B sample for EV applications and then all the solid foundation that we've built with EV OEMs, we plan to definitely continue to work with our EV OEMs, and we continue to have a very good relationship and partnership with them. At the same time, we plan to take this solid foundation that we built modify it for EV applications. It's a totally new field. It's a field that's happening much faster than we expected and is the field that like I mentioned earlier, lithium that we really believe that in this decade, 2020, lithium metal is going to enable the same way that lithium ion enabled consumer electronics 30 years ago in the 1990s. So it's a really exciting field for the future of transportation as well as. So I really appreciate everyone's support.