Hello, and welcome to the SES AI Corporation Fourth Quarter Earnings Call. My name is Alex, and I will be coordinating the call today. [Operator Instructions] I would now hand over to our host, Eric Goldstein, Vice President of Investor Relations. Please proceed.

Thank you, Operator. Hello, everyone, and welcome to our conference call covering our fourth quarter 2022 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 just after 7:00 a.m. today, which provides a business update as well as our financial results. You'll find a press release with a link to our shareholder letter, and today's conference call webcast in the Investor Relations section of our Web site at ses.ai. Before we get started, this is a reminder 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 afternoon, we will review our business as well as results for the quarter. With that, I'll pass it over to Qichao.

Thanks, Eric. Good afternoon, everyone, and thanks for joining our fourth quarter conference call. As the leader in lithium-metal batteries, SES continues to evolve and innovate, despite all the challenges that come with new battery developments. We have made some exciting progress that we would like to share with you. 2022 was a difficult, but productive year. We built and completed three A-sample lines, one in Shanghai, China; and two, in Chungcheongbuk-do, South Korea, one for each of our three OEM JDA partners: GM, Hyundai, and Honda. The necessary level of dedicated engineering, quality, and production output required us to have dedicated lines for each OEM. Importantly, we achieved ready-to-use status for all three A-sample lines, under budget and ahead of time. This experience strongly supports our strategy of building lithium-metal cells using lithium-ion manufacturing process, and building A and B-samples in Asia, so that we can come back to the U.S. for C-samples, and commercial production in the most efficient way possible. SES was the first battery company in the world to introduce 100 amp-hour lithium-metal cells, the first to enter in automotive A-sample JDA with a major OEM, and the first to encounter all the start-up issues that come with producing 100 amp-hour lithium-metal cells at pilot scale. As we detailed on our previous earnings call, we encountered countless issues ranging from ultra-thin lithium-anode wrinkling and tearing during large format rolling and lamination, novel electrolyte solvent scale up, electrode stacking misalignment and overhand, powder formation during electrode punching, formation pressure and voltage stability, finding efficient ways to do image scanning on large format cells, and developing proper ways to store, handle, test, and recycle lithium-metal cells. One really important thing we have learnt over the past decade of development, when our team can identify a specific issue, we…

Thank you, Qichao. Good afternoon, everyone. Today I will cover our fourth quarter financial results and discuss our operating and capital budgets for full-year 2023. In the fourth quarter, our operating expenses were $20.7 million, an increase of $10.6 million from the same period last year. Stock-based compensation expense was $6.8 million in the quarter. We reported R&D expenses of $8.3 million, an increase of $3.1 million from the same period last year. This increase reflects higher personnel costs due to increased headcount to support battery cell development, and increase in lab consumables and material supplies, and the increase in development costs related to our advanced AI software and battery management system. Our gross R&D spend in the fourth quarter was $13.5 million, which was offset by $5.2 million built to our OEM partners, which are treated as contour R&D expenses. Our G&A expenses were $12.5 million, an increase of $7.5 million from the same period last year. Similar to the third quarter, this increase was primarily driven by higher personnel costs to support our operations as a public company, higher insurance costs, and an increase in professional fees and outside services. We incurred a non-cash gain of $9 million at the end of the quarter associated with a change in fair value of our Sponsor Earn out liability. As we have previously outlined, certain trenches of our Sponsor Earnout shares are accounted for as a derivative liability measured at fair value based on the price of our common stock at the end of the quarter. For full-year 2022, cash used in operations was $46.5 million and was less than our previously provided guidance of $55 million to $60 million. The lower level of spending reflects a combination of some conservatism on our part and lower overall spending from materials…

Thanks, Jing. Alex, can you open the line for questions now?

Thank you. [Operator Instructions] Our first question for us today comes from Winnie Dong of Deutsche Bank. Your line is now open. Please go ahead.

Hi, thank you so much for taking the questions. First question is could you give us a sense of like maybe the type of feedback that you've been getting from your JDA partners from the A-sample cell. And then are there any for B-sample cells this year, perhaps maybe a sense of timeline for delivery as you fill sort of like a mid-year target? Thanks.

Yes, Winnie, so we've been sending samples to our three JDA partners for testing really since the beginning that we entered into A-sample, back in 2021. And then just over the past two years or so we made a lot of progress both in terms of the material performance as well as manufacturing feasibility. And then one key aspect of all three A-sample JDAs is basically to demonstrate the manufacturing feasibility of lithium-metal cells. And the fact that we've built three A-sample lines, and then we delivered total -- well, we both tested and delivered total -- about a thousand of these large lithium-metal cells just last year, and then also improved the performance of these cells quite a lot. So, that overall gave the OEMs confidence with both the performance that we demonstrated as well as the manufacturing feasibility. And then so that's why we are preparing to enter the next phase. And then in terms of timing of the B-sample, I mean the B-sample is really -- it's not like a single-point milestone. It's not like today you, all of a sudden, go from A-sample to B-sample; it's a process. And then for us when -- or this B-sample itself, it's not really about marketing for us, it's this gradual progress that will happen this year, basically continue to demonstrate the manufacturing feasibility at a much higher level, much better quality, much higher output. So, it will happen around mid this year. And then whether when we're going to make announcements, that's another story that I really don't care about. But fundamentally, the company will enter into B-sample, and then it's a core milestone. And then it's a validation both to the material improvements as well as the manufacturing feasibility that we have demonstrated.

Okay, thank you so much. As you look ahead to 2023, I know you've talked about headcount expansion, and equipment and manufacturing facilities, and then continue to invest in materials and things like that. If you were to maybe like boil it down to a few key milestones to achieve by year-end, what can we look to add the scorecard by this year?

Yes, a few things. One is quality. And then, last year, I would say that was the first year we started doing pilot scale manufacturing of these large cells, and the quality was actually pretty bad. And this is why we had a lot of issues that we addressed. And then this year, the quality basically needs to be at an entirely new level. And then also SES, as an organization, when we were in A-sample, we still had sort of a startup organization. And then now, as we prepare for the next phase, and then B-sample, and then project management and quality management manufacturing supply chain, all these managements will really enter into an entirely new level. And then we are putting systems in place to really make SES, as an organization, a lot more capable at manufacturing and quality. So, one key thing is it's not just Band-Aid improvements to improve the quality, but fundamentally improving the organization so it's capable of a much higher level of quality and manufacturing management. I think this is probably the biggest milestone. And then at the same time, I mentioned so the A-sample is about 0.2cpm, so five minutes per cell. B-sample roughly is about five cells per minute, so the speed at which we need to build these cells will be much, much higher while entering into a new level of quality. And then a couple other milestones, including some of the new materials that we've been working on, new electrolytes, new anode. And then the scaling up of these materials because we'll be making cells at much higher speed. That means all these new materials that we've developed, we'll also need to make these materials at much higher volume.

Got it, thank you so much. If I can squeeze one in, this one's for Jing. I guess on your cash used in operation in [indiscernible] for 2024, you came in sort of much lower. Can you just remind us what were the factors that contributed to the lower spending, and could that also be some conservatism baked into your 2023 numbers?

So, for 2022, the lower level of spending, part of that is just being conservative and be careful with our cash. And then the second part is really, as Qichao mentioned in the last earnings call, that we are focusing on building cells to solve issues, not just to build cells for the sake of building them. So, we built less cells in 2022 comparing to the original plan. So, those are some of the drivers for 2022. For 2023, I think the, as I mentioned during the call, a lot of these spending go into the growth part of our business. We have a pretty aggressive hiring plan. And we're pulling forward some of the spending to built B-samples lines so that we can be ready to transition into B-sample this year with our OEM partners.

Great, thank you so much for taking my questions. I'll pass it on.

Thank you.

Thank you. Our next question comes from Gabe Daoud from TD Cowen. Gabe, your line is now open, please go ahead.

Hey, everyone. Thanks for taking my questions and for all the detailed remarks so far. Qichao, I was hoping, maybe just at a high level, you could provide some of your thoughts around one of your OEM partners, GM, potentially shifting toward cylindrical cells versus pouch, with Samsung, as has been reported recently in the news. Just curious if you worry or you just think about maybe OEMs continuing to make a shift towards cylindrical as a way to optimize cost at the expense of high-performing anodes via pouch cells? Just any color on that would be helpful.

Yes, I can't comment on the particular choice of formats, especially for GM. I mean, one thing that we are working now with other OEMs is basically trying to find the optimal form factor at the end, for example, is it going to be a 100 amp-hour pouch cell, is it going to be a 100 amp-hour stacked but then prismatic cell, is it going to be a 70 amp-hour, is it going to be a 60 amp-hour, is it going to be a 50 amp-hour? What is the final optimal, basically the cell design? That's actually part of this A-sample and B-sample work. And then we are testing, for example, 100 amp hours, 70 amp hours, 60 amp hours with, for example, high-nickel cathodes, blended cathodes, different types of cathodes because the final cell, the final format is going to be based on a holistic consideration of safety, performance, cost; several factors. And the fact that we've built a 100 amp-hour stacked pouch cells doesn't mean that we will end up actually putting 100 amp-hour cells inside the cars, it's most you understand the boundary of the limitations. The final cell might very well be a 70 amp-hour cell. But all this we've built A-samples, and also B-samples, and then we improve the quality, and then increase the production output so that we can collect more data and then also run more experiments faster so we can make all these -- so we and our OEM JDA partners can make all these decisions based on data. So, we haven't -- and that's what we've been focusing now, stacked pouch cells, maybe stacked prismatic cells, and then also with different cathodes, and also just the capacity of the cells, we'll also test a range of different capacities so we can find the optimal final cell design that we can actually put into the vehicle based on a complete -- a very holistic consideration of lots of different factors.

Got it, okay, that's helpful. And then you mentioned data, so maybe a good segue into a question on Avatar. You know that some of the challenges that actually enabled you to drive an improvement in tracking or predicting cell safety on the larger amp hour cells with 60% accuracy versus 0% in the beginning of the year, so -- and then the smaller cells have 99% accuracy. So, could you maybe just talk a little bit more about Avatar and the progression there and some of the improvements there that you're seeing?

Yes, so we really found Avatar is a necessity. And then beginning of last year, beginning of 2022, because we didn't really have any large cell data, and Avatar is basically very data driven. So, we had zero capability to predict anything to the larger cells because we just didn't have any data to begin with. And then we collected more data, and then these larger cells are actually quite different from the smaller cells. For example, the impedance is much lower, and then any variation in impedance -- you know, lot of the parameters that we use to predict health and life in small cells just simply don't work when we scale up to the larger cells. So, we had to develop new parameters. And then also, we also had to collect a wider spectrum of data, for example, the smaller cells we did current, voltage, and temperature. Now, we're doing current, voltage, temperature, and pressure. Pressure is a really important factor in predicting the health and safety of these large lithium-metal cells. And then also based on the data that we collect, we also both through a combination of internal physics-based models where we actually predict health based on actual fundamental physics mechanism as well as just machine learning models, that's really recommended; very interesting parameters. So now, with more data, so last year, 2022, we had B-sample lines -- A-sample lines, and then we built and then tested about a thousand of these cells now. And then based on that data pool we got to cross 60% accuracy. Now that as we prepare to enter B-sample with much better quality, much better consistency, and much higher output, that we expect both the quality of the data as well as the size of the data pool to significantly grow. And then that will significantly improve the accuracy of Avatar for the larger cells even faster.

Got it. Thanks, Qichao, thanks everyone.

Thanks, Gabe.

Thank you. [Operator Instructions] Our next question comes from Shawn Severson from Water Tower. Shawn, your line is now open, please go ahead.

Great, thank you. Good morning, everyone. Qichao, I wanted to go back to the B-samples this year, and look at kind of what gives -- two things, what gives you the confidence that they'll be achieved this year. And then second to that, has this economic environment or, let's call it, the volatility, do you sense any changes in how OEMs are looking at things and timing or if they're just kind of ploughing right through this because they have to?

Yes, on the first one, well so -- I mean, A-sample, B-sample, these are not really magic, right? There is a formula behind it. It's a step-by-step, very clear -- a process behind it. And so, last year, we were in A, and then we had a lot of quality issues, and the volume was just not so high. So, we've addressed and solved lot of them and then also to accelerate the learning, so lithium-metal is a totally new thing. And then, before the industry put lithium-ion into cars, lithium-ion was using consumer electronics and laptops and other industries for a long time. So, the automotive industry already has a lot of data and then a lot of experience with lithium-ion now because lithium-metal is totally new and also we improve the quality and manufacturing feasibility to a level so that we were ready to take this to a new level so that we can actually manufacture more cells and then collect more data. One of the key reasons of doing A-sample is of doing B-sample is A-sample was still not fast enough and just the amount of data and the amount of experience that we and our OEM partners collected just was not fast enough. So, we want to go to B-samples, so we can have this data and learning much faster. So, and this is why we are preparing to enter into B. We couldn't do that earlier because we still had some pretty key quality issues and then it didn't make sense to enter into B without solving these issues. But now we've solved a lot of the core quality issues and also we are putting systems and then also upgrading the organization. So, it's time to enter into B, it will be accelerated learning compared to A-samples. So, yes, this is what we and the OEM partners are planning to enter into B. It's not magic.

Great. And then, the fact -- and nor is that economically sensitive or anything like that. This is just a natural progression that isn't going to be really delayed for any reason, I guess because like you said, it's all formulaic, right?

Correct, and I mean the economic environment so far hasn't really played, hasn't really impacted A-sample, B-sample decision.

And in your conversations with OEMs, I know it's a bit of a guessing game, but when you look out when they're thinking model year production for something like this, if you're in A and you're going to B this year, what does that translate into timing, when in their minds they'd be thinking about production scale?

Yes, I can't really go into details of that. If you think about we're going to be this year and then end up '24 it is about '25, '26 basically new model vehicle being introduced.

Introduced, okay. Last question is on the supply chain. Obviously, lots of focus in the industry, domestic production and all the things we all know very well. And you've been focused on that for even before the Inflation Reduction Act and all of these things. Just wanted an update, are you seeing that really come together? I mean, has there been a good push, as you see it through your supply chain to meet those deliverables when the time comes for large scale production?

Yes, as I mentioned earlier, we're really targeting '25, '26 for the larger scale introduction of lithium-metal into vehicles. And then, already right now, 2023, we and then a few suppliers were planning to implement capabilities for lithium-salt, the electrolytes, and then also lithium refining capabilities in North America. And then, a lot of these implementations will take about two years. So, by the time 2025 comes, and then lithium-metal is ready for commercial, several of the key materials, at least from my perspective based on our perspective, electrode and lithium-anode will also be sourced in North America. So, we are preparing both the cell level as well as the material level in parallel.

Great. Thanks, Qichao. I'll jump back in the queue.

Thank you.

Thank you. We currently have no further questions for today. So, I'll hand back to Qichao for any further remarks.

Yes, so back in 2021, we were the first to enter automotive A-sample and then last year '22, that's when we really started manufacturing lithium-metal cells in pilot scale. It was really difficult because it was something no one had done before and we encountered a lot of issues, and we were very transparent about those issues, but we also made tremendous progress solving these. Now entering B-sample is not magic, it's just a natural next step. And it will be a huge milestone, not just for us, but the entire industry. It will be a huge validation for our practical approach to making lithium-metal cells using lithium-ion manufacturing process. It's something that we've been talking about since the beginning and also it will be a huge step forward for our OEM partners. We made a lot of progress, but still a lot of work to do, and hope everyone will stay tuned, and we will provide lot more exciting updates later. So, thank you.

Thank you for joining today's call. You may now disconnect your lines.