SES AI Corporation — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. SES develops lithium-metal rechargeable batteries for electric vehicles and is pre-commercialization; it reported no revenue from its principal business activities. The February 3, 2022 business combination was accounted for as a reverse recapitalization, so reported historical results primarily reflect Old SES.
Financial performance and position
- Revenue and margins: No principal-business revenue was reported. Gross profit and operating margins are not applicable; the company has not begun principal commercial operations.
- Q2 results: Operating expenses were $19.1 million, including $7.2 million of research and development and $11.9 million of general and administrative costs. Operating loss was $19.1 million. Net income was $9.0 million, or $0.03 per share, chiefly because of a $29.0 million non-cash gain from remeasuring the Sponsor Earn-Out liability.
- First-half results: Operating expenses totaled $38.3 million, versus $11.0 million in the first half of 2021. Net loss was $18.0 million, or $0.07 per share, compared with a $10.2 million loss, or $0.17 per share, a year earlier. The first-half 2022 results included a $21.3 million non-cash earn-out fair-value gain.
- Expense growth: Q2 R&D expense rose 105% year over year and G&A rose 289%; first-half R&D rose 73% and G&A rose 499%. The company attributed increases mainly to hiring, stock-based compensation, software development, public-company costs, insurance and professional fees. Reported R&D expense reflects JDA reimbursements; management separately cited R&D activity spending of $11.3 million for Q2 and $17.2 million for the first half, with $4.1 million and $5.9 million, respectively, reimbursable by OEM partners.
- Cash flow: First-half operating cash outflow was $28.2 million, versus $15.1 million in 2021; investing outflow was $10.0 million, versus $140.7 million, largely because prior-year investing included purchases of short-term investments. Financing provided $283.0 million, primarily from the business combination and PIPE financing. Cash, cash equivalents and restricted cash increased by $244.1 million.
- Liquidity and debt: At June 30, cash and cash equivalents were $404.6 million and restricted cash was $0.5 million. Total current assets were $415.9 million and current liabilities $15.1 million. Total liabilities were $41.8 million; the company reported no debt obligations. Management said available cash was sufficient for at least the next 12 months and expected to fund the Pilot Facility and creation of Expansion I, subject to development timing and spending assumptions.
- Balance sheet and financing: Total assets were $453.6 million, stockholders’ equity $411.8 million and accumulated deficit $112.3 million. The business combination and PIPE generated $282.9 million of net cash proceeds; preferred stock converted to common stock at closing.
Material changes and unusual items
- Compared with December 31, 2021, cash and cash equivalents increased from $160.5 million to $404.6 million, principally following the February 2022 business combination and PIPE. The company raised $274.5 million in PIPE proceeds and received $51.6 million from Ivanhoe’s trust account, before transaction costs and other amounts.
- The $9.0 million Q2 net income is not indicative of operating profitability: the company had a $19.1 million operating loss, offset by a non-cash earn-out valuation gain. The liability was $15.1 million at quarter-end; its valuation is sensitive to the company’s stock price and assumptions.
- Stock-based compensation was $8.7 million for the first half, versus $0.2 million in the prior-year period. Unrecognized compensation cost was $52.1 million at June 30.
- Adoption of lease accounting in January 2022 resulted in recognition of operating lease right-of-use assets and liabilities. At June 30, operating lease liabilities were $11.5 million, current and non-current combined.
Outlook, risks and contingencies
- Management expects R&D spending to rise significantly as hiring, equipment investment, prototyping and testing continue; G&A is also expected to increase as the company expands and meets public-company requirements.
- Management’s stated development plans included a 1 GWh Pilot Facility targeted for completion by 2023 and operation by 2024; a 10 GWh joint-venture facility targeted to be operational by 2025 and ramp to 30 GWh by 2027; and further expansion plans intended to bring total capacity above 100 GWh by 2028. Commercial production was targeted for 2025. These are plans, not assured outcomes.
- The GM, Hyundai and Honda joint development agreements focus on battery development and do not commit the automakers to purchase SES cells. The JDAs involve up to $50 million of agreed development activities and expenditures. A South Korea pre-production facility construction and fit-out agreement was expected to involve approximately $17 million of construction costs.
- Shanghai COVID-19 restrictions caused a shutdown in April 2022 and delayed development, testing, manufacturing and supplier access by more than a month. The facility reopened June 1; future disruptions remain possible.
- Key risks include technology development and commercialization, scaling manufacturing, competition, supply-chain and materials availability, EV adoption, financing needs, international operations, and potential delays or cost increases. The company remains loss-making with negative operating cash flow and expects substantial spending before meaningful revenue.
- Management concluded disclosure controls were ineffective because of material weaknesses in internal control over financial reporting, including an unremediated weakness involving stock-based compensation accounting and disclosures. Management targeted remediation by December 31, 2022 but gave no assurance it would meet that timetable. The filing also states the company expected to cease being an emerging growth company at year-end 2022, increasing compliance requirements.
- No material litigation was reported. The company disclosed $14.2 million of purchase obligations, including commitments related to the South Korea facility, and $0.5 million of letters of credit secured by restricted cash.
Most important facts for investors to verify
- Whether battery development and scale-up milestones, including A-Sample work and facility schedules, are achieved; and whether OEM agreements lead to commercial purchase commitments.
- Cash burn, capital expenditure needs and whether the reported $405.2 million of cash and restricted cash can support planned facilities and operations without additional financing.
- The composition and volatility of quarterly earnings: Q2 net income depended on a non-cash earn-out fair-value gain, not operating profits.
- Progress in remediating internal-control material weaknesses and the timing and cost of public-company compliance obligations.
- Effects of COVID-19 or other supply-chain disruptions, and the company’s ability to manage construction commitments and manufacturing costs.