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 the accompanying unaudited interim condensed consolidated financial statements as of and for the three and six months ended June 30, 2022 and the related notes included in this Quarterly Report on Form 10-Q and our audited consolidated financial statements as of and for the years ended December 31, 2021 and 2020 and the related notes contained in Exhibit 99.1 of Amendment No. 1 to the Current Report on Form 8-K filed with the SEC on March 31, 2022 (the "Super 8-K Amendment"). This Quarterly Report on Form 10-Q includes forward-looking statements. 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. These forward-looking statements involve a number of risks, uncertainties (some of which are beyond our control) or other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements. Factors that might cause or contribute to such forward-looking statements include, but are not limited to, those set forth in Part II, Item 1A of this Quarterly Report on Form 10-Q and in Item 1A. Risk Factors in the Company's Annual Report on Form 10-K filed with the SEC on March 31, 2022 (the "2021 Annual Report"). Unless the context otherwise requires, references in this section to "the Company", "we", "us" and "our" refer to the business and operations of SES Holdings Pte. Ltd. ("Old SES") and its consolidated subsidiaries prior to the Business Combination and to SES AI Corporation and its consolidated subsidiaries following the Closing. 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.
SES is engaged in the development and production of high-performance, Lithium-Metal ("Li-Metal") rechargeable battery technology for EVs and other applications. Since our founding in 2012, we have been committed to developing the world's most advanced EV batteries. Our Li-Metal batteries have been designed to combine the high energy density of Li-Metal with cost-effective, large-scale manufacturability of conventional Lithium-ion batteries.
We are a pre-commercialization stage company with no revenue to date. During the three and six months ended June 30, 2022, the Company spent $11.3 million and $17.2 million on research and development activities, respectively, of which $4.1 million and $5.9 million, respectively, is reimbursable by original equipment manufacturers of automotives ("OEM Partners") under our JDAs (defined below).
We have incurred the following operating results for the periods noted:
? $9.0 million net income for the three months ended June 30, 2022; and $6.6
million net loss for the three months ended June 30, 2021
? $18.0 million net loss for the six months ended June 30, 2022; and $10.2
million net loss for the six months ended June 30, 2021
? We have an accumulated deficit of approximately $112.3 million from our
On February 3, 2022 (the "Closing Date"), Ivanhoe Capital Acquisition Corp. ("Ivanhoe"), a Cayman Islands exempted company, and Wormhole Amalgamation Sub Pte. Ltd., a Singapore private company limited by shares and a direct, wholly-owned subsidiary of Ivanhoe ("Amalgamation Sub"), consummated the previously announced business combination (the "Business Combination") pursuant to which, among other things, Amalgamation Sub merged with and into Old SES, with Old SES surviving the Business Combination as a wholly-owned subsidiary of Ivanhoe. In connection with the closing of the Business Combination (the "Closing"), Ivanhoe migrated out of the Cayman Islands and
domesticated as a Delaware corporation prior to the Closing (the "Domestication") and changed its name to "SES AI Corporation." See "Note 3 - Business Combination" for additional information about the business combination.
Key Trends, Opportunities and Uncertainties
As a pre-commercialization stage company, we believe that our performance and future success depend on several factors that present significant opportunities for us but also pose significant risks and challenges, including those discussed below, and the Risk Factors set forth in Part II, Item 1A of this Quarterly Report on Form 10-Q and in Part I, Item 1A of the 2021 Annual Report.
We have maintained a strong partnership with General Motors ("GM") since 2015, when GM led our Series B financing, and since then, GM has invested approximately $70.0 million in our Company, including its investment in the PIPE Financing. GM is one of the world's largest car companies, and has voiced its desire to be a leader in EVs. GM has announced plans to launch more than 30 new EV models by 2025 and only sell zero-emission vehicles by 2035. Our collaboration initially involved close technical and research and development collaboration on SES's battery technology. In February 2021, we entered into a joint development agreement ("JDA") with GM, valued at over $50.0 million, under which we will work with GM to develop an A-Sample battery cell with a capacity of almost 100 Ah.
We have also fostered a partnership with Hyundai, another global automobile leader. In December 2020, we entered into a pre-A Sample JDA with Hyundai. In May 2021, Hyundai made an investment of $50.0 million in our Series D plus funding round and signed an A-Sample JDA, under which we and Hyundai are collaborating to develop an A-Sample battery cell. We believe the Hyundai JDAs align our interests with those of Hyundai and will facilitate further collaboration in designing and developing our technology and products. Hyundai has also purchased $50.0 million of our Class A Common Stock in the PIPE Financing.
In December 2021, Honda became the third global automobile leader to enter into an A-Sample JDA with us. Honda purchased $75.0 million of our Class A Common Stock in the PIPE Financing as the single largest PIPE Financing investor.
The JDAs with GM, Hyundai and Honda do not represent commitments by these manufacturers to purchase our Li-Metal battery cells and are focused only on development. Although the JDAs have set timeframes for the attainment of certain development milestones, these timeframes are objectives only and may be subject to ongoing elaboration and change by the parties. The JDAs also do not prohibit GM, Hyundai, Honda or SES from entering into new agreements with other automobile or battery companies.
We believe that our products will experience swift market adoption due to our current strategic partnerships with global leading OEMs GM, Hyundai and Honda. We plan to collaborate with other OEMs to expedite such adoption and increase market acceptance of our Li-Metal battery over time. We expect to form strategic joint ventures with one or more battery makers or OEMs to support the build-out of our Expansion I Facility (as defined below).
Product and Manufacturing Process Development
Our product development activities concentrate on making further improvements to our battery technology, including improvements to battery performance and cost. Major development efforts include, but are not limited to:
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 at a large, global scale. We are developing
processes and equipment to scale up the manufacturing of current cell design
from three to nine Ah capacity to approximately 100 Ah.
Module and pack design: Li-Metal cells must be integrated into modules and
? packs as part of their integration into vehicles. We have active development in
integration of our Li-Metal cells in modules to ensure that our Li-Metal cells
perform as intended once they are integrated into modules and vehicles.
Advanced artificial intelligence ("AI") software and battery management systems
("BMS"): Software is critical to ongoing monitoring of battery health and
? safety. We continue to develop advanced AI algorithms to diagnose battery
cell-related health issues, develop advanced 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 also continue to develop novel methods of laminating or depositing lithium
metal anode 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.
Lithium 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
With 62 granted patents and 57 pending patent applications as of June 30, 2022 and ten years of research and development experience, we have a history of technological innovation. We have a strong research and development team, including employees with expertise in all aspects of the development process, including materials science, chemistry, engineering and software. We intend to make significant investments in research and development and the recruitment of top technical and engineering talent to improve our battery technology. As we grow our team and the size of our proposed 1 GWh pilot facility in China that is expected to be completed by 2023 and operational by 2024 (the "Pilot Facility"), our materials consumption and the rate of cash utilization as a function of time will also increase significantly.
We are currently working to develop and produce A-Sample batteries with specifications required by OEMs for their EVs, with the goal of enabling commercial production in 2025. As of the date of this Quarterly Report, Phase I of our Pilot Facility has been completed and is ready-to-use. We will continue to enhance our production processes to enable volume manufacturing in a cost-effective manner. We expect to complete our 1 GWh Pilot Facility and South Korea facility by 2023, followed by a 10 GWh joint venture plant, which is expected to be built in 2023 and 2024 and operational by 2025 and to ramp up to 30 GWh by 2027 (our "Expansion I Facility"). Additionally, we expect to complete a 30 GWh facility in 2026 that will ramp to 70 GWh by 2028 (our "Expansion II Facility"), which would represent an additional expansion of our existing facilities. In total, we expect to have more than 100 GWh of capacity by 2028.
The battery market, like the EV market it services, is fast-growing, extremely competitive and driven by the innovation of both large incumbents and emerging entrants like SES. We acknowledge that the incumbents and other emerging entrants may have greater resources to invest in advancing their technologies, access to more potential customers, or strategic relationships with OEMs (or other third parties) that may give them a competitive edge. We further acknowledge that these disparities, where they exist, have the potential to harm our business, results of operations or financial condition.
We have incurred net losses and negative cash flows from operations since our inception. Assuming we experience no significant delays in the research and development of our Li-Metal battery, we believe that our cash resources are sufficient
to fund the completion of our Pilot Facility and creation of our Expansion I Facility. For more information, see "Liquidity and Capital Resources" below.
There are government regulations pertaining to battery safety, transportation of batteries, use of batteries in vehicles, factory safety and disposal of hazardous materials. We will ultimately have to comply with these regulations to sell our batteries into the market.
Since the emergence of a novel strain of coronavirus ("COVID-19") in December 2019, the COVID-19 pandemic has caused general business disruption throughout the United States and worldwide. The effects and potential effects of COVID-19, include, but are not limited to, its impact on general economic conditions, trade and financing markets, changes in customer behavior and has created significant uncertainty in the overall continuity in business operations, generally. The spread of COVID-19 has also disrupted the manufacturing, delivery and overall supply chain of EVs and EV batteries, and has led to a global decrease in vehicle sales in markets around the world. In particular, the COVID-19 crisis may cause a decrease in demand for EV batteries if fleet operators delay purchases of EVs or if fuel prices for internal combustion engine vehicles do not create enough of an incentive to accelerate the migration from internal combustion engine vehicles to EVs, an increase in costs resulting from efforts of manufacturers of EVs or EV batteries to mitigate the effects of COVID-19, delays in EV manufacturers' schedule to full commercial production of EVs, as well as disruptions to these supply chains, among other negative effects.
The pandemic has resulted in government authorities implementing many measures to contain the spread of COVID-19, including travel bans and restrictions, quarantines, shelter-in-place and stay-at-home orders, and business shutdowns. We have also previously been, and are being, affected by temporary manufacturing closures, employment and compensation adjustments, and impediments to administrative activities supporting our start-up and manufacturing plans.
Following the re-opening of non-essential businesses and the easing of restrictions on non-essential in-person work, since January 1, 2021, we have ramped up research and development hiring and increased our investment in in-person work. Currently, we anticipate that research and development expenses will increase significantly for the foreseeable future as a result of additional hiring of scientists, engineers and technicians and investment in additional plant and equipment for product development, building prototypes and testing of battery cells. Spikes in COVID-19 cases in Shanghai resulted in government-mandated temporary shutdowns at our Shanghai location in April 2022, causing a delay of over a month in our development, testing and manufacturing efforts and in our product schedule and our ability to obtain materials from our suppliers in the affected area. The government-mandated shutdown was lifted on June 1, 2022 and the Shanghai facility has since re-opened. If our workforce is unable to work effectively, including due to illness, quarantines, government actions or other restrictions in connection with COVID-19, our operations will be adversely affected.
We continue to monitor closely the impact of COVID-19 on all aspects of our business and geographies, including its impact on our employees, suppliers, business partners and potential distribution channels and customers. The extent to which the COVID-19 pandemic may continue to affect our business will depend on continued developments, which are uncertain and cannot be predicted. Even after the COVID-19 pandemic has subsided, we may continue to suffer an adverse effect to our business due to possible longer-term global economic effects of COVID-19, including any economic recession. If the immediate or prolonged effects of the COVID-19 pandemic have a significant adverse impact on government finances, it would create uncertainty as to the continuing availability of incentives related to EV purchases and other governmental support programs. In addition, a recurrence of COVID-19 cases or an emergence of additional variants or strains could cause other widespread or more severe impacts depending on where infection rates are highest.
Components of Results of Operations
We are an early-stage growth company in the pre-commercialization stage of development, and conduct our business through one operating segment. We have not generated any revenue from sales to customers, and our historical results may not be indicative of our future results for reasons that may be difficult to anticipate. Our ability in the future to generate revenue sufficient to achieve profitability will depend largely on the successful development of our products. 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.
Research and development expenses consist primarily of costs incurred for salaries and personnel-related expenses, including stock-based compensation expense, 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. As we attempt to develop a battery cell with acceptable performance, yields and costs, we anticipate that research and development and related expenses will increase significantly for the foreseeable future as a result of additional hiring of scientists, engineers and technicians and investment in additional plant and equipment for product development, building prototypes and testing of battery cells.
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. We continue to rapidly expand our personnel headcount to support our growth and operations as a public company. Accordingly, we expect our general and administrative expenses to increase significantly in the near term and for the foreseeable future. Upon commencement of commercial operations, we also expect to incur customer and sales support and advertising costs.
Research and development expenses for the three months ended June 30, 2022 increased $3.7 million, or 105%, to $7.2 million, compared with $3.5 million the three months ended June 30, 2021. The increase primarily resulted from a $1.9 million increase in personnel costs mainly attributable to our growth in headcount in support of our ongoing research and development efforts for battery cell development, which included $1.7 million of stock-based compensation expense, of which $0.8 million relates to restricted earnout shares issued as part of the Business Combination transaction in February 2022. Further, there was a $1.9 million increase in software development costs related to our advanced AI software and BMS and a $0.9 million increase in expenses for lab consumables and material supplies. The remainder of the increase was attributable to immaterial other spend. These increases were partly offset by $1.3 million of reimbursements received against the JDAs.
Research and development expenses for the six months ended June 30, 2022 increased $4.8 million, or 73%, to $11.3 million, compared with $6.5 million for the six months ended June 30, 2021. The increase primarily resulted from a $2.8 million increase in personnel costs mainly attributable to our growth in headcount in support of our ongoing research and development efforts for battery cell development, which included $2.3 million of stock-based compensation expense, of which $1.3 million relates to restricted earnout shares issued as part of the Business Combination transaction in February 2022. Further, there was a $1.9 million increase in software development costs related to our advanced AI software and BMS and a $1.6 million increase in expenses for lab consumables and material supplies. The remainder of the increase was attributable to immaterial other spend. These increases were partly offset by $1.7 million of reimbursements received against the JDAs.
General and administrative expenses for the three months ended June 30, 2022 increased $8.8 million, or 289%, to $11.9 million, compared with $3.0 million for the three months ended June 30, 2021. This increase primarily resulted from a $5.6 million increase in personnel costs mainly attributable to our growth in headcount to support our operations as a public company, which included $3.8 million of stock-based compensation expense, of which $1.1 million relates to restricted earnout shares issued as part of the Business Combination transaction in February 2022. Further, there was a $2.0 million increase in insurance expense to cover potential liabilities under our indemnification obligations to our directors and certain officers of the Company and a $0.9 million increase in professional fees and outside services associated with external consulting, legal, audit and accounting services. The remainder of the increase was attributable to immaterial other spend.
General and administrative expenses for the six months ended June 30, 2022 increased $22.5 million, or 499%, to $27.0 million, compared with $4.5 million for the six months ended June 30, 2021. This increase primarily resulted from a $9.2 million increase in personnel costs mainly attributable to our growth in headcount to support our operations as a public company, which included $6.5 million of stock-based compensation expense, of which $2.3 million relates to restricted earnout shares issued as part of the Business Combination transaction in February 2022. Further, there was a $4.6 million increase due to deferred offering costs associated with the Sponsor Earn-Out liability, a $3.3 million increase in insurance expense to cover potential liabilities under our indemnification obligations to our directors and certain officers of the Company, a $2.2 million increase in professional fees and outside services associated with external consulting, legal, audit and accounting services, a $1.5 million increase in fees related to marketing and public relations for the Company, and a $1.4 million increase in expenses primarily related to our offices in the U.S. and South Korea. The remainder of the increase was attributable to immaterial other spend.
Interest income for both the three and six months ended June 30, 2022 increased $0.5 million, respectively, compared with an immaterial amount in the prior year periods due to an increased investment in money market funds.
Gain on Change of Fair Value of Earn-Out Liability, Net
During three and six months ended June 30, 2022, we incurred a $29.0 million gain and a $21.3 million gain, respectively, associated with the change in fair value of the Sponsor Earn-Out liability. This change in the fair value, which is a non-cash gain that was recorded within other (expense) income, net on the condensed consolidated statement of operations and comprehensive loss, caused the Company to report a net income for the three months ended June 30, 2022. With the fair value of the Sponsor Earn-Out liability tied to the Company's stock price, continued volatility in the stock price could result in further gains or losses resulting from the change in fair value. Refer to "Note 5 - Fair Value" to the condensed consolidated financial statements for additional information.
During the three months ended June 30, 2022, we had other expense of $1.2 million, compared with other expense of $0.1 million for the three months ended June 30, 2021. The $1.1 million increase in other expense was primarily the result of the accounting for certain postemployment benefits partially offset by unrealized and realized foreign currency gains primarily due to the strengthening of the U.S. dollar compared with the Chinese renminbi (RMB) and South Korean won (KRW).
During the six months ended June 30, 2022, we had other expense of $1.3 million, compared with other income of $0.8 million for the six months ended June 30, 2021. The $2.1 million increase in other expense was primarily the result of the accounting for certain postemployment benefits and a gain recorded in the prior year from the forgiveness of the PPP loan received in 2020, partially offset by unrealized and realized foreign currency gains primarily due to the strengthening of the U.S. dollar compared with the Chinese renminbi (RMB) and South Korean won (KRW).
The provision for income taxes for the three and six months ended June 30, 2022 and 2021 was immaterial.
On February 3, 2022, as a result of the aforementioned Business Combination and PIPE Financing, we raised $282.9 million in net proceeds. Prior to that, since our inception we raised approximately $269.9 million of funding through the sales of our redeemable convertible preferred stock. As of June 30, 2022, we had total cash, cash equivalents and restricted cash of $405.2 million and an accumulated deficit of $112.3 million. As an early-stage growth company in the pre-commercialization stage of development, the net operating losses we have incurred since inception are consistent with our strategy and budget. We believe that our cash on hand will be sufficient to meet our working capital and capital expenditure requirements for a period of at least the next 12 months, and also sufficient to fund the completion of our Pilot Facility and creation of our Expansion I Facility. However, additional funding may be required for a variety of reasons, including delays in expected development.
The proceeds raised from Business Combination and PIPE Financing will be used in future research and development activities and are sufficient for the building of manufacturing prototyping lines to facilitate the production of pre-manufacturing batteries by 2024. We have yet to generate any revenue from our business operations, and since inception, we have not achieved profitable operations or positive cash flows from our operations.
We plan to finance our operations with a combination of proceeds from the Business Combination, capital from investors, and if required in the future, loans from financial institutions, as well as anticipated future revenue from product sales. Our ability to successfully develop our products, commence 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.
As a result of the capital-intensive nature of our business, we expect to sustain substantial operating expenses without generating sufficient revenues to cover expenditures for a number of years. Over time, we expect that we will need to raise additional funds through a variety of possible methods, including, but not limited to, entry into joint ventures or other strategic arrangements, the issuance of equity, equity- related or debt securities or through obtaining credit from financial institutions. These funds are expected to finance our principal sources of liquidity, ongoing costs such as research and development relating to our batteries and the construction of manufacturing facilities, including the creation of our Expansion I Facility and Expansion II Facility.
If we were to require additional funding or otherwise determine it was beneficial to seek additional sources of financing or enter into other arrangements as described above, we believe that our debt-free balance sheet would enable us to access financing on reasonable terms. However, there can be no assurance that such additional capital would be available on attractive terms, if at all, when needed, which could be dilutive to stockholders. We may be forced to decrease our level of investment in product development or scale back our operations. Furthermore, the cost of debt could be higher than anticipated. There can also be no assurance that positive cash flow from operations can be achieved or sustained.
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