Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis provides information which our management believes is relevant to an assessment and understanding of our consolidated results of operations and financial condition. The following discussion and analysis should be read in conjunction with our audited consolidated financial statements as of and for the years ended December 31, 2024 and 2023 and the accompanying notes included in this Annual Report on Form 10-K. The following discussion may contain forward-looking statements that reflect our plans, estimates and beliefs, which are subject to risks, uncertainties and assumptions. These forward-looking statements within the meaning of the federal securities law are based on our current expectations and beliefs concerning future developments and their potential effects on us. These forward-looking statements are not statements of historical fact and may include statements regarding possible or assumed future results of operations. There can be no assurance that future developments affecting us will be those that we have anticipated. Our actual results and the timing of events may differ materially from those expressed or implied as a result of various factors, including those set forth in the sections titled “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements.” References in this section to our future plans that indicate the timing of when we expect such plans to be completed by a certain year mean at any point during that year.
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Overview
We are a leading developer and manufacturer of high-performance, AI-enhanced Lithium-Metal and Li-ion rechargeable batteries for EVs, UAM, drones, robotics, BESS and other applications. Our differentiated battery technology has been designed to combine the high energy density of Li-Metal with the large-scale manufacturability of conventional Lithium-ion (“Li-ion”) batteries and will help to promote the transition from the global dependence on fossil fuel-based automotive vehicles to clean and efficient EVs and help enable an era of electric transportation in the air.
SES’s mission is to accelerate the world’s energy transition through material discovery and battery management. To assist in achieving this mission, we have partnered with leading global OEMs, including GM, Hyundai, and Honda, among other strategic partners, under JDAs and service contracts to develop and produce our Li-Metal battery cells and technology. We have transitioned from the development and production of A-Sample batteries to B-Sample batteries with specifications required by OEMs for their EVs. This transition began when we signed a B-Sample agreement for Li-Metal development of EVs. A-Sample batteries are functional prototypes developed for OEMs based on their technical specifications. These are in contrast with B-Sample batteries, which are A-sample batteries manufactured under much higher throughput and tested in actual vehicles, and C-Sample batteries, which would be fully functional, mature samples for mass production and tested for full drivability in actual vehicles.
We are also conducting research and development activities to further improve the performance, quality and cost of our battery technology by focusing on the following key areas, all of which we expect to help us achieve our commercialization goal, at our facilities in Woburn, Massachusetts in the United States, Shanghai, China, and Chungju, South Korea. These activities include:
● Scale-up : Our design is further being customized with and validated by several OEMs. Based on our collaborations with OEMs, we believe that a roughly 100 Ah cell-size manufactured at GWh scale (five to seven cells-per-minute) is needed to achieve commercialization in EVs and UAMs at a large, global scale. We are developing processes and upgrading equipment to scale up the manufacturing of our current cell design from three to nine Ah capacity to 50 Ah and 100 Ah capacity.
● Module and Pack Design : Li-Metal cells must be integrated into modules and packs as part of their integration into vehicles. Our active development efforts are focused on the integration of our Li-Metal cells in modules to enable our Li-Metal cells to perform as intended once they are integrated into vehicles.
● AI Software and BMS : Software is critical to the ongoing monitoring of battery health and safety. We continue to develop AI algorithms to diagnose battery cell-related health issues, develop control algorithms and charging methods to enhance cycle life and safety, and port such software on to a BMS that could be integrated into a battery pack.
● Advanced Materials and Coatings : We continue to research and develop advanced electrolyte and anodes to further improve cycle life and safety. In addition, we continue to develop novel methods of laminating or depositing lithium metal onto current collector that can be deployed at commercial GWh scale.
● Cathode Materials and Design : We develop our Li-Metal cells for a variety of different cathode materials, cathode design and cathode processing methods that can provide ultra-high energy density and/or significant cost-reduction.
● Li-Metal Recycling : Along with other battery components that are already being recycled today, Li-Metal foil will also need to be recycled in the future. We continue to explore methods of recycling that are productive and cost-effective.
Results of Operations
The following table sets forth a comparison of our operating results for the periods indicated:
Years Ended December 31,
$
%
(in thousands)
2024
2023
Change
Change
Revenue from customers
2,040
-
2,040
100.0
%
Cost of revenue
752
-
752
100.0
%
Gross profit
1,288
-
1,288
100.0
%
Operating Expenses
Research and development
72,141
$
30,675
41,466
135.2
%
General and administrative
38,395
47,483
(9,088)
(19.1)
%
Total operating expenses
$
110,536
$
78,158
$
41,466
53.1
%
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Loss from operations
(109,248)
(78,158)
32,378
(41.4)
%
Further, we have incurred net losses of $100.2 million and $53.4 million for the years ended December 31, 2024 and 2023, respectively, and have an accumulated deficit of $298.9 million and $198.7 million from our inception through December 31, 2024 and 2023, respectively. Our historical results may not be indicative of our future results for reasons that may be difficult to anticipate and our ability to generate revenue in the future that is sufficient enough to achieve profitability will depend largely on the successful development of our products and services. Accordingly, the drivers of our future financial results, as well as the components of such results, may not be comparable to our historical results of operations.
Factors Affecting Operating Results
Revenue from Customers
In October 2024, we began to generate revenue from our principal business activities. We generate revenue from two primary sources:
● Product revenue generally consists of Li-Metal battery cells and battery materials, such as electrolyte, sold to automotive OEMs and other manufactures .
● Service revenue generally consists of services for the design and development of Li-ion and Li-Metal battery materials in accordance with the customer’s specifications .
Revenue for the year ended December 31, 2024 was $2.0 million and was primarily attributable to service-related contracts from OEM and other manufacturers.
Cost of Revenue
Cost of revenue includes materials, labor, depreciation and amortization expense, inventory, freight costs, and other direct costs related to manufacturing our products and service contracts. Labor consists of personnel-related expenses such as salaries, benefits, and stock-based compensation. We anticipate that cost of revenue will continue to increase as we enter into new revenue contracts.
Cost of revenue for the year ended December 31, 2024 was $0.8 million primarily attributable to personnel costs.
Research and Development
We are an early-stage growth company that has just begun the commercialization stage of development and conduct our business through one operating segment. We have spent $81.5 million and $44.9 million on research and development activities, which is prior to credits received by our OEM partners under the JDAs during the years ended December 31, 2024 and 2023, respectively.
Research and development expenses consist primarily of costs incurred for personnel-related expenses, including salaries, benefits, and stock-based compensation expenses, for scientists, experienced engineers and technicians, expenses for materials and supplies used in product research and development, process engineering efforts and testing, as well as payments to consultants, patent related legal costs, depreciation, and allocated facilities and information technology costs.
Research and development expenses for the year ended December 31, 2024 increased $41.5 million, or 135.2%, to $72.1 million, compared with $30.7 million for the year ended December 31, 2023. The increase primarily resulted from a $14.6 million decrease in reimbursements from our JDA partners due to culmination of a couple of JDA activities. In addition, there was a $10.5 million increase in lab consumables and material supplies and JDA equipment expenses, a $9.2 million increase in personnel costs mainly attributable to salaries, benefits and stock-based compensation expense associated with higher headcount to support new materials discoveries and all in on AI initiatives, and a $4.4 million increase in computer and software development costs due to AI infrastructure spend. Further, there was a $2.7 million increase in facility costs due to newly commissioned electrolyte foundry . We expect research and development expenses to remain consistent in 2025 compared with 2024.
Out-of-Period Adjustment
During the year ended December 31, 2023, an expense of $2.0 million related to Earn-Out Restricted Shares was erroneously reversed upon a former employee’s departure. This misstatement resulted in an understatement of research and development expense by $2.0 million for the year ended December 31, 2023, as well as an understatement of additional paid-in capital as of December 31, 2023, by the same amount.
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The Company corrected this misstatement during the year ended December 31, 2024, which resulted in a $2.0 million overstatement of research and development expense for the year ended December 31, 2024, with a corresponding impact on APIC. The correction of $2.0 million is included in the increase of $9.2 million noted in the above paragraph. In accordance with ASC 250 – Accounting Changes and Error Corrections, the Company evaluated the materiality of the misstatement from both quantitative and qualitative perspectives for the prior period errors and concluded that it was immaterial to both the prior period and the current period.
General and Administrative
General and administrative expenses consist primarily of costs incurred for salaries and personnel-related expenses, including stock-based compensation expense, for our finance, legal and human resource functions, expenses for director and officer insurance, outside contractor and professional service fees, audit and compliance expenses, legal, accounting and other advisory services, as well as allocated facilities and information technology costs including depreciation and amortization. Upon commencement of commercial operations, we also expect to incur customer and sales support and advertising costs.
General and administrative expenses for the year ended December 31, 2024 decreased $9.1 million, or 19.1%, to $38.4 million, compared with $47.5 million for the year ended December 31, 2023. This decrease primarily resulted from a $5.2 million decrease in personnel-related expenses, including stock-based compensation expense, that relates to lower stock-based compensation due to forfeitures from headcount reductions. In addition, a $1.7 million decrease in general liability insurance costs due to lower rates, and a $3.3 million decrease in audit fees, legal expenses and professional and consulting fees due to change in auditors and nonrecurring prior period expenses. These decreases were partly offset by a $1.0 million increase in rent and facility costs due to expansion of facility in our headquarters office and a $0.3 million increase in expenses related to investor relations, repairs and maintenance, and information technology services .
Non-Operating Items
Interest Income
Interest income primarily consists of interest earned on our cash and cash equivalents, which are primarily invested in money market funds, and short-term investments in marketable securities, which are invested in U.S. treasury securities, and accretion income from the marketable securities.
During the year ended December 31, 2024, we had interest income of $15.0 million compared with $16.7 million for the year ended December 31, 2023. This $1.7 million decrease was primarily due to a decrease in investment balances resulting from cash used in operations .
Change of Fair Value of Sponsor Earn-Out Liabilities
During the year ended December 31, 2024, we incurred a $5.3 million loss compared with a $6.8 million gain for the year ended December 31, 2023 associated with the change in fair value of the Sponsor Earn-Out liabilities. This $12.1 million decrease in gain on the change in fair value of the Sponsor Earn-Out liabilities is tied to SES’s stock price, continued volatility in the stock price or changes in the expected term. See “Note 11 – Sponsor Earn-Out Liabilities” to the consolidated financial statements for additional information.
Miscellaneous Income (Expense), Net
During the year ended December 31, 2024, we had miscellaneous expense of $0.5 million, compared with miscellaneous income of $0.4 million for the year ended December 31, 2023. This $0.9 million increase in miscellaneous expense was primarily due to $0.7 million loss on sale of assets and $0.6 million of interest expense related to our unearned government grant liability that was not incurred in prior year. These increases were partly offset by receipts of government subsidy, and unrealized and realized foreign currency gains due to the weakening of the Chinese renminbi and South Korean won compared with the U.S. dollar.
(Provision) Benefit from Income Taxes
Income tax expense was $0.2 million on pre-tax loss of $100.0 million for the year ended December 31, 2024 compared with an income tax benefit of $0.9 million on pre-tax loss of $54.3 million for the year ended December 31, 2023. Our effective tax rate was (0.2)% and 1.6% for the years ended December 31, 2024 and 2023, respectively. The difference between our effective tax rate and the U.S. federal statutory rate of 21% was primarily driven by deferred tax benefits and release of valuation allowances from foreign jurisdictions. See “Note 16 – Income Taxes” to the consolidated financial statements for additional information on our income tax expense.
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Liquidity and Capital Resources
As of December 31, 2024, we had total cash and cash equivalents of $128.8 million, short-term investments in marketable securities of $133.7 million, and an accumulated deficit of $298.9 million. As an early-stage growth company that has just begun the commercialization stage of development, the net operating losses we have incurred since inception are consistent with our strategy and budget.
We expect to sustain substantial operating expenses, without generating sufficient revenues to cover expenditures, for a number of years. Our ability to successfully develop our products and services, scale up our commercial operations and expand our business will depend on many factors, including our working capital needs, the availability of equity and/or debt financing and, over time, our ability to generate positive cash flows from operations. To date, we have funded our operations through a combination of proceeds from the Business Combination and subsequent equity private placement in 2022 and funding received through the sales of our redeemable convertible preferred stock. We believe that our cash on hand and marketable securities resulting from these proceeds will be sufficient to meet our principal working capital and capital expenditure requirements and ongoing costs, such as research and development relating to our Li-Metal batteries and the construction of additional manufacturing facilities, for a period of at least 12 months from the date of this Annual Report on Form 10-K, as well as to full commercialization. However, additional funding may be required during or after this period for a variety of reasons, including additional opportunities to purchase data and equipment to develop and train our AI models, develop commercial operations in the United States, business combinations or acquisitions, and delays in expected development of our Li-Metal battery cells. If we need such additional funding beyond these existing short- to medium-term sources of liquidity, or if following commercialization, we are not able to fund our operations from cash flows generated from anticipated product sales, we expect that we will need to raise additional funds. This may be through a variety of possible methods, including, but not limited to, entry into joint ventures or other strategic arrangements, issuance of equity, equity-related or debt securities or through obtaining credit from financial institutions, as well as anticipated future revenue from product sales. For more information about our at-the-market equity offering program with certain investment banks, through which we may offer and sell, from time to time, shares of Class A Common Stock having an aggregate offering price of up to $150.0 million, see “Part II, Item 9.B. Other Information.”
Summary of Cash Flows
The following table provides a summary of our cash flow data for the periods indicated:
Years Ended December 31,
(in thousands)
2024
2023
Cash (used in) provided by:
Operating activities
$
(66,086)
$
(56,412)
Investing activities
108,192
32,719
Financing activities
1,010
3,275
Effect of exchange rate changes on cash
(687)
(552)
Net increase (decrease) in cash, cash equivalents and restricted cash
$
42,429
$
(20,970)
Operating Activities
Our cash flows used in operating activities to date have been comprised of payroll, revenue from customers, consumables and supplies related to research and development, expenditures and reimbursements related to our JDAs, and facilities expense and professional services for general and administrative activities. As we continue to grow as an early commercialization company, we expect our cash used in operating activities to increase before we start to generate any material cash inflows from our operations.
Net cash used in operating activities of $66.1 million for the year ended December 31, 2024 was primarily attributable to net loss of $100.2 million, as adjusted for non-cash operating items such as stock-based compensation expense of $19.9 million, depreciation and amortization expense of $8.3 million, accretion income from available-for-sale short-term investments of $7.2 million, a loss on change in fair value of Sponsor Earn-Out liabilities of $5.3 million, and a loss on sale of fixed asset of $0.7 million. These non-cash operating items were combined with a $8.4 million working capital inflow. The working capital inflow was driven primarily by a $7.6 million increase in accrued expenses and other liabilities and a $3.9 million decrease in receivable from related party. These working capital inflows were partially offset by working capital outflows of a $2.2 million increase in prepaids and other assets and a $1.0 increase in accounts receivable. The increase in accrued expenses and other liabilities was primarily due to accruals for purchases of equipment for a JDA, accrued income taxes payable, and payroll related accruals. The decrease in receivable from related party was driven by cessation of activity from a JDA. The increase in prepaids and other assets was primarily due to AI infrastructure license and rental advance payments, license fees for software, and advance payments for research agreements. The increase in accounts receivable is due to outstanding balances for earned but unbilled revenue.
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Net cash used in operating activities of $56.4 million for the year ended December 31, 2023 was primarily attributable to net loss of $53.4 million, as adjusted for non-cash operating items such as stock-based compensation expense of $20.6 million, accretion income from available-for-sale short-term investments of $11.1 million, a gain on change in fair value of Sponsor Earn-Out liabilities of $6.8 million, and depreciation and amortization expense of $5.5 million. These non-cash operating items were combined with a $11.1 million working capital outflow. The working capital outflow was driven primarily by a $8.2 million increase in prepaids and other assets, a $1.5 million increase in receivable from related party, a $1.1 million increase in deferred tax assets, a $0.1 million decrease in accrued expenses and a $0.2 million increase in inventories, partially offset by a $0.1 million increase in accounts payable. The increase in prepaids and other assets was primarily due to insurance costs to cover potential liabilities under our indemnification obligations to our directors and certain officers, license fees for software, advance payments for research agreements, and VAT taxes. The increase in receivable from related party was driven by activity from a JDA. The decrease in accrued expenses and other liabilities was primarily due to adjustments for fixed assets in accruals at period end, accrued income taxes payable, payroll related accruals and the accounting of certain postemployment benefits. The increase in inventories was driven by current purchases with limited consumption of materials. The increase in accounts payable was primarily due to an increase in accounts payable related to the purchase of property and equipment for the South Korea and Shanghai facilities offset by a decrease in vendor payables .
Investing Activities
Net cash provided by investing activities was $108.2 million for the year ended December 31, 2024, compared with net cash used in investing activities of $32.7 million for the year ended December 31, 2023. Investing activities include purchases of investments, maturities of investments, and purchases of property, plant, and equipment.
Purchases and Maturities of Investments – Net proceeds of short-term investments were $120.4 million for the year ended December 31, 2024, compared with net proceeds from maturities of short-term investments of $48.5 million for the year ended December 31, 2023. The $71.9 million increase in net proceeds was driven by the nature and time to maturity for the treasury securities included in our portfolio in the current year and cash needs for operations.
Capital Spending – Capital expenditures were $12.2 million and $15.8 million for the years ended December 31, 2024 and 2023, respectively. These expenditures primarily related to purchases of lab machinery and equipment, lab tools and instruments and leasehold improvements to our facilities in the United States. We expect capital expenditures to decrease in 2025 compared with 2024 as we continue to spend on AI related infrastructure rather than invest in manufacturing equipment.
Financing Activities
Net cash provided by financing activities of $1.0 million for the year ended December 31, 2024 was primarily attributable to proceeds from the exercise of stock options.
Net cash provided by financing activities of $3.3 million for the year ended December 31, 2023 related to proceeds received from a government grant and proceeds from the exercise of stock options
Contractual Obligations and Commitments
The following table summarizes our material contractual obligations for cash expenditures as of December 31, 2024, and the periods in which these obligations are due:
Short Term
Long Term
Total
Purchase obligations (1)
$
29,774
$
3,870
$
33,644
Operating lease obligations (2)
3,458
9,429
12,887
Total
$
33,232
$
13,299
$
46,531
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(1) Purchase obligations include commitments for the purchase of lab supplies and equipment as well as committed spend related to a JDA. These commitments are derived from purchase orders, supplier contracts and open orders based on projected demand information.
(2) Operating lease obligations represent the fixed lease payments for the noncancelable lease term, fixed lease payments for optional renewal periods where the Company is reasonably certain the renewal option will be exercised, variable lease payments that depend on an underlying index or rate in effect at lease commencement, and future minimal lease payments for executed but not yet commenced lease agreements.
Recent Accounting Pronouncements
See “Note 2 – Summary of Significant Accounting Policies” of our accompanying consolidated financial statements included in this Annual Report on Form 10-K for more information about recent accounting pronouncements, the timing of their adoption, and their potential impact on our financial condition, results of operations and cash flows.
Critical Accounting Estimates and Judgments
Our consolidated financial statements have been prepared in accordance with U.S. GAAP which requires management to use judgment in making estimates and assumptions that affect the reported amounts of assets, liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements, as well as the reported expenses incurred during the reporting periods.
We consider an accounting estimate or assumption to be critical when (1) the estimate or assumption is complex in nature or requires a high degree of judgment and (2) the use of different judgments, estimates and assumptions could have a material impact on the financial statements. Our significant accounting policies are described in “Note 2 – Summary of Significant Accounting Policies” of our accompanying consolidated financial statements included in this Annual Report on Form 10-K. We consider the following to be our critical accounting estimates.
HIDDEN_ROW
Description
Judgments and Uncertainties
Effect if Results Differ From Assumptions
Stock-Based Compensation
We record stock-based compensation expense according to the provisions of ASC Topic 718 – Stock Compensation. ASC Topic 718 requires all share-based awards to employees, including grants of Restricted Stock Units (RSUs), Performance Stock Units (PSUs), Restricted Stock Awards (RSAs), and employee stock options, to be recognized in the financial statements based on their fair values.
Prior to the Business Combination, the RSAs and stock option grant date fair value of Old SES common stock was historically determined by its board of directors with the assistance of management and an independent valuation.
Post Business Combination, as our common stock is publicly traded, the fair value of RSU grants is based on the closing market price on the date grants are made . The fair value of PSU grants is determined through an independent valuation of the likelihood of the performance metrics being met within the terms of the award.
We determine the appropriate fair value model (Black-Scholes model for Options and RSAs, Monte Carlo simulation for PSUs) to be used for valuing share-based issuances and the amortization method for recording compensation cost, which can be impacted by the following assumptions:
●
expected term
●
expected volatility
●
expected dividend yield
●
risk-free interest rate
If we were to change any of these judgments or estimates, it could cause a material increase or decrease in the amount of stock-based compensation expense reported.
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HIDDEN_ROW
Description
Judgments and Uncertainties
Effect if Results Differ From Assumptions
Revenue Recognition
We recognize revenue within the scope of Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers (“ASC 606”). ASC 606 requires that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services.
To achieve this core principle, we apply the following five-steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation.
Satisfaction of the performance obligation based on percentage of completion or cost to completion basis, which determines the amount of revenue to be recognized using either the output method or the input method. Both methods are used in our contract revenue recognition.
We use estimation and judgment to determine the proper allocation of labor and overhead costs to these contracts. Direct materials, labor, and overhead costs are used to estimate total cost to complete for the contract. Adjustments to this total cost to complete estimate impact revenue recognition since actual costs for the period compared to total estimated contract costs to complete is used to determine the satisfaction of performance obligations for revenue recognition
If we were to change any of these judgments or estimates, it could cause a material increase or decrease in the amount of revenue reported.
Earn-Out Restricted Shares
The Earn-Out Restricted Shares are accounted for as a single tranche equity award issued to employees subject to time and share price vesting hurdle. These Earn-Out Restricted Shares have a share price vesting hurdle and are also subject to forfeiture if a recipient’s service terminates prior to the vesting. Pursuant to ASC 718 – Stock Compensation, we recognize stock-based compensation based on the fair value determined as of Closing with the assistance of management and an independent valuation.
We determine the appropriate fair value model (Monte Carlo simulation) to be used for valuing share-based issuances and the amortization method for recording compensation cost, which can be impacted by the following assumptions:
●
expected term
●
expected volatility
●
expected dividend yield
●
risk-free interest rate
●
probability of change of control
If we were to change any of these judgments or estimates, it could cause a material increase or decrease in the amount
of stock-based compensation expense reported.
Sponsor Earn-Out Liabilities
Certain Sponsor Earn-Out Shares are accounted for as a derivative liability measured at fair value, with changes in fair value recorded in the consolidated statements of operations and comprehensive loss at each reporting period, because the earn-out events that determine the number of Sponsor Earn-Out Shares to be earned back by the Sponsor include events that are not solely indexed to the common stock of the Company.
The fair value of our common stock, which is publicly traded, is used in determining the fair value of the derivative liability at each valuation date with the assistance of management and an independent valuation.
We determine the appropriate fair value model (Monte Carlo simulation) to be used for valuing the derivative liability to record the change in fair value in our consolidated statements of operations and comprehensive loss, which may be impacted by the following assumptions:
●
expected volatility
●
risk free rate
●
expected term
●
probability of change of control
If we were to change any of these judgments or estimates, it could cause a material increase or decrease in the amount of earn out liability reported.
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