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. 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 Jing Nealis, Chief Financial Officer. We issued our shareholder letter earlier this morning, which provides the 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 in the Investor Relations section of our website at ses.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 expectations 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 B-sample joint development agreement, JDA, with one of our OEM customers in the next few weeks. This will be the world's first automotive B-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 is an inherent trade-off between energy density and safety. Many companies improve safety by using safer chemistries such as lithium iron phosphate (LFP) cathodes or solid-state electrolyte. LFP is indeed safer than high nickel cathodes and in theory, solid-state appears to be less volatile than liquid lithium metal. So why don't we switch to these safer chemistries? While these safer chemistries appear to improve safety, we believe they make unacceptable compromises to energy density, manufacturability, and other important parameters. For example, an LFP cathode has about half the energy density of a high nickel cathode, 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, let's say. 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 B-sample for lithium metal. No one thought lithium metal with a high nickel cathode could 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. Even advanced lithium-ion with a high nickel cathode can have severe safety risks and we believe our advancements address the safety issues in both lithium-ion and lithium-metal. For example, our new high nickel cathode active materials have the same capacity as equivalent traditional high nickel cathodes, but are much more stable. Our new cathode electrode coating and treatment process allows the same cathode to pass rigorous safety tests, including nail penetration and heating, has new pouch cell engineering with a self-venting mechanism that allows gradual safe release of energy during thermal runaway. A new electrolyte that is safer with no compromise on performance, a newly protected lithium metal anode, and a 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 cathode. We are now able to delay the thermal runaway onset temperature and reduce peak temperature and pressure during thermal runaway significantly. Some companies that are in earlier stages of lithium metal development talk about dreams of perfectly safe batteries. In most cases, the battery capacity or energy density is so low that it's useless. To be in automotive B-sample, which we believe is the most advanced in lithium metal development anywhere in the world, we deal with practical safety concerns, not dreams on paper. It's exhilarating to see our batteries during safety tests, going from big explosions to small explosions to big fires to small fires to just smoke. It feels like witnessing a successful rocket launch after many failures. We recently completed our second testing bunker. Now we have even greater resources 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 unsafe things. Without these bunkers, without this safe environment to test unsafe things, we will not be able to understand the mechanism, we will not be able to make unsafe things safe, and next-generation batteries and transportation would not be able to move forward. At our upcoming Battery World 2023, in December, we will demonstrate some exciting videos of high-energy density lithium metal batteries passing very rigorous safety tests. We never thought we could achieve such safety while maintaining high energy density. This is a big milestone towards our goal of commercializing large-capacity high-energy density lithium metal cells for automotive applications. In terms of manufacturability, last quarter, we indicated we would increase our A-sample lines to 1,000 large capacity 100 amp-hour cells per line per month from approximately 500 per month. November will be the first month that we will attempt to build 1,000 A-sample 100 amp-hour cells at our Chungju line in Korea. These cells will be used for both internal testing and OEM sample qualification, and avatar safety prediction algorithm training. We currently have three A-sample lines in operation and two B-sample lines under preparation, one line for an EV application and one for a UAM application. For the two B-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 B-sample cell development until the new B-sample lines become operational, which we expect to occur in 2024. By running our lines up to 1,000 large 100 amp-hour cells per month, we will also gain valuable experience in avatar cell traceability and quality system development. We have even hired a dedicated field data collection team to help ensure that the data is correct and collected through the correct process. This team helps our avatar algorithm safety prediction tremendously by providing verifiable and complete data. In summary, earlier this year, we established a milestone to transition to B-sample and we are almost there. This is a major milestone for us and for the battery and transportation industry. And as a result of solid fundamental core material chemistry and cell engineering breakthroughs in safety for high energy density lithium metal batteries with a high nickel cathode. From A-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 lithium metal batteries, such as drones and urban air mobility, UAM. 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 30 years ago in the 1990s. The world's first lithium metal 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.

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 counter 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 nine 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 plan and drive our commercialization roadmap forward, while we keep investing in core material innovation with the goal to always stay ahead of the 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 B-sample. We expect the bulk of our capital expenditures for Line 4 and Line 5 to fall in 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 attracting and retaining 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.

Thank you. Our first question comes from Winnie Dong from DB. Winnie, your line is now open. Please go ahead.

Yes. Thank you so much for taking my question. I was wondering if you can describe sort of how the next amount of work will look like in the context of transitioning to B-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, good question. So from a contractual perspective, basically, we're going through the standard legal and financial process to get the documents signed. And then from a practical work perspective, so one key thing that we have demonstrated is safety at Level 5. And then we've already demonstrated at Level 5 a small cell level. And then in the next few months, we need to further verify at Level 5 at a 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 B-sample. In B-sample, we are going to build about five to ten cars worth of batteries. So now safety and practical safety actually becomes really important. So they want to see very detailed testing under 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 B-sample. So the B-sample will likely take about a year to 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 one of the key initiatives this year. I was wondering with the year almost ending, are you where you hope to be or need to be with your sort of like talent composition?

Yes. We always seek more and better talent, and we're never fully satisfied with our recruitment efforts, especially since the market is quite competitive, which is ultimately positive. It’s an exciting time in the industry. You can see that we are looking to hire professionals such as battery engineers, material scientists, and AI scientists, all of whom are in high demand worldwide. We believe there's always room for improvement, but we have recently made some impressive hires. For instance, we brought on Kang Xu as our Chief Scientist, who is highly regarded in battery electrolyte expertise. Additionally, we have made several recent hires in cell engineering, many with substantial experience from leading Korean battery companies. This has allowed us to strengthen our team for the B-sample project and expand into eVTOL. Previously, we had three teams focused on the three A-samples, and now we are working to enhance our team as we transition from A to B and move into eVTOL. We are making good progress, but we are always looking to do more.

Thank you for that. I'd like to ask a broader question regarding the recent discussions about the EV adoption curve, which seems to be less robust than initially expected. We've heard this from both suppliers and OEMs. While I understand that your focus is on product development, are you hearing similar concerns from your JDA partners about the adoption curve not being as strong, or can you offer any insights on this? Thank you.

Yes. I think, I mean, the adoption curves can always be impacted by, for example, the economy and 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 Tesla and NIO, they are very much committed to EV adoption. So there might be some impacts from the economy and other factors. But in terms of the battery roadmaps, no change there.

Thank you so much. I'll pass it along.

Thank you.

Our next question comes from Shawn Severson from Water Tower Research. Shawn, your line is now open. Please go ahead.

Great. Thanks and good morning, everyone. Qichao, 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 timeline of what we'd be looking at in the urban air mobility space.

That's a great question, Shawn. All the efforts we're making with electric vehicle original equipment manufacturers in A-sample and B-sample involve enhancing the production line, quality, cell design, safety, and performance. Most of this can be applied to eVTOLs, as the urban air mobility sector requires similar parameters to those needed by EV manufacturers. In fact, eVTOLs have even stricter safety standards, along with necessary cell design and quality. Moreover, while EV OEMs are committed to lithium-metal, there are established players like LG, CATL, Samsung, and SK heavily invested in the EV market. In contrast, eVTOL represents a significant opportunity since many larger companies are less engaged with the eVTOL space due to perceptions of a smaller near-term market. However, for us, in next-generation batteries, this is very exciting. For instance, one eVTOL requires about the same battery capacity as two cars. In our EV B-sample, we can produce batteries for ten cars, which translates to five eVTOLs. Supplying batteries for five eVTOLs to companies like Joby and Archer would be considered a commercial success. Although the volume might be less, the margins and economic factors are much more favorable because this is a new market with standards yet to be established. We have the chance to be early movers in lithium metal for eVTOL, enabling us to set those standards. Once we do, organizations like the FAA or those in Europe will likely adopt them, giving us the potential to have the first FAA-certified lithium metal battery for urban air mobility. Establishing those standards will allow us to shape the certification process in this sector for the next five to ten years, which could have a significant impact.

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 to transportation, is that correct?

We truly enjoy collaborating with the electric vehicle companies, which tend to be larger and more entrepreneurial, with similar mindsets and sizes. Our partnership involves sharing data and adjusting our business model to align with market demands. This market is incredibly exciting, and developments in electric vertical takeoff and landing aircraft are progressing quicker than anticipated. For instance, one eVTOL company will conduct a demonstration flight during the summer Olympics next year, and numerous cities worldwide are planning these eVTOL demonstrations. Progress is occurring much faster than we had expected.

Thanks. And my last question is we've had the supply chain shift in place for several quarters now in terms of pushing towards domestic supply, right, and qualifying for IRA. What's the progress report there? Have you seen things materially change? 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, do you feel very comfortable that you've got everything that you need at this point going forward?

Yes, yes. So a very good point. And then, for example, on the anode side, and then I was just at a conference with Applied Materials. So Applied Materials, live and these U.S.-based lithium anode 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 electrolyte. And so the anode and the salt are two really key parameters to us. And then also several of our capital vendors are already setting up plans. For example, in Canada, North America to supply the cathode. And then once we are towards the later stage of B-sample, then we will sit down with our EV OEMs and potential eVTOL OEMs to discuss where in North America to set up a plant for the battery cells.

Great. Thanks for that, Qichao. Congratulations on the progress.

Yes. Thank you, Shawn.

Our next question comes from Jeff Grampp from Alliance Global Partners. Jeff, your line is now open. Please go ahead.

Good morning. I have a question about the transition to B-samples with the automakers. Can you provide an assessment of how far behind the others are? It seems like you have one front-runner you are close to. Is there a way to gauge the progress of the other two in relation to the first one? If you manage to achieve the B-sample with the first one, will that help in encouraging the others due to some third-party validation, or is that not really significant in the eyes of the automakers?

Yes. Good question. So actually, the specs transition from A to B for all three OEMs and actually all OEMs around the world are quite similar in performance and safety. So working on transition to B with one 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 two probably in terms of the gap, can be measured in months, just different OEMs. In the past, a year to two years during the A-sample development process, we had different timelines because we had different focuses then for 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 I'll say, 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 one 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 talking 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 anxiety, 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 yours forward? Or is it pretty similar from what you guys have seen historically?

Yes. The OEMs have shifted their focus from concerns about range anxiety to prioritizing safety and cost. However, they remain committed to their technology platforms. For instance, lithium metal batteries can offer benefits in both range and cost. If the range remains the same, a longer-range battery can actually be smaller, which can lead to cheaper packaging. Therefore, lithium metal technology can be tailored to meet the OEM's objectives for either extended range or reduced costs.

Understood. Great, thank you for the time.

Thank you.

Our next question comes from Timothy Johnson. Timothy, please go ahead.

Yes, good morning and thank you for taking my question. My question concerns the lithium metal anode. There are many processes for making such an anode. They're all problematic to one extent or another. Can you please elaborate a little bit more on the process that you use to lay down your lithium metal 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.

Certainly. There are several techniques for applying lithium foil as an anode. The main methods include extrusion, where thicker lithium foil is reduced to a thinner form and laminated onto a current collector; physical deposition, which involves evaporating lithium in a chamber so it lands on a substrate; and slurry coating, which uses a lithium powder slurry that is applied and then dried. Each method has its advantages and disadvantages, but extrusion and lamination are currently the most developed processes for lithium foil application. One challenge with this method is producing wide foil, but we have an internal solution for that, enabling us to create large format 100 amp-hour lithium metal cells. We are also testing the other two methods as they may provide long-term benefits, and we could potentially switch processes within a year to 18 months. We will keep the industry informed about our progress. The choice of method ultimately depends on which yields the best metrics in cost, manufacturing efficiency, and performance. Regarding the composite coating, it enhances safety and cycle life. However, I can’t provide specifics about the materials we use or the exact application methods since there are various coatings and application points within the cell. The primary goals are to improve safety and prevent internal shorts while also extending cycle life.

Our next question comes from Bimis Hugh, a private investor. Bimis, your line is now open. Please go ahead.

Good morning. Thank you for taking my questions. My question is about the A-sample JDA. You previously mentioned it includes different cathode chemistries in addition to high nickel. Has there been any progress in other chemistries aside from high nickel, like LFP lithium metal?

Yes. So actually, in A-sample, we tested both high nickel, LFP and also mixtures of those two. And then in B-sample, we will continue to test these different cathodes. And the reason that we do that is not that we are 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 one of which is what cathode we're going to use. And then these different cathodes 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 one standard unified cell with a unified cathode, but that's not likely. So we are actively testing high nickel and the different types of high nickel, LFP, different versions of LFP and the mixtures of those two. And of course, there are different ways of mixing those two. And we evaluate at the end of the day, the performance and density and the 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 cells. We only make lithium metal cells.

Okay. So related to Line 4 and 5. Line 4 and 5 are designed for B-samples since eVTOL has a lower volume, but can Line 5 be used for commercialization for eVTOL?

Exactly. Very good question. And I think Shawn from Water Tower asked the same question. So Line 4 is for EV, but then it's ten cars of batteries a year, and that's considered B-sample for EV. Line 5, we can make ten cars or five eVTOLs worth of batteries per year. But that's considered commercial because in EV, no OEM will give you an order for ten cars, right? But then in eVTOLs, a lot of the eVTOL companies will happily give you an order for three aircraft or five aircraft, and these are very high margin. And this helps us set the standards in the industry. Clear, Line 5 will be for eVTOLs.

So if that's the case, will there be a B-sample line just for eVTOL or Line 5 is more like the C-sample and SOP for eVTOL?

Yes. So eVTOL OEMs don't really divide the phases as clearly as the EV OEMs. So B, C, SOP are sort of mixed together.

Thanks for the time.

Thank you.

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.

Thank you all for joining us and for your support. It has not been easy to reach this stage, but we are very close to beginning B-sample for electric vehicle applications. We plan to continue working with our electric vehicle original equipment manufacturers and maintain our strong relationships and partnerships with them. Additionally, we intend to adapt the solid foundation we have established for electric vertical takeoff and landing applications. This is an entirely new area that is developing more rapidly than we anticipated. We believe that lithium metal will drive eVTOL advancements in this decade, much like lithium-ion technology propelled consumer electronics in the 1990s. This presents an exciting future for transportation and lithium metal batteries. Thank you for your continued support.

Thanks everyone. This concludes this conference. You may now disconnect your lines. Thank you.