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. [Operator Instructions] 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 labs-scale safety, we are talking about practical real-world safety. In the battery industry, there's 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 do things the…

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 to attract and retain 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.

Perfect. Thank you. [Operator Instructions] 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 -- 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 the financial process to getting 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 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 10 cars worth of batteries. So now safety and then 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. It's the talent, I mean, we always want more and better. And we're never satisfied with talent acquisition and the market is very competitive, which is a good thing. I mean, it's a really exciting market. And then -- and you can probably tell the kind of people that we're trying to hire, battery engineers, material scientists, AI scientists, these are very much in demand, almost around the world. So I'm sure we can always do better. But actually, recently, we actually made some pretty impressive hires. For example, on the material science side, we hired our Chief Scientist, Kang Xu. He is one of the world's most renowned experts in battery electrolyte and also with -- on the cell engineering side, we also hired -- we also made a few hires recently. And then -- and these guys have extensive experience from the big Korean battery companies. So actually recently, we made quite a bit of progress. And then that allows us to beef up our team for the B-sample and also to expand to eVTOL. So we currently have -- so in the past, we had three teams for the three A-samples. And now we're going to keep beefing up our team to go from A to B and also expand into eVTOL. So we're making good progress, but never enough.

Thanks for that. And then maybe a more high-level question just in the context of like recent narratives around EV adoption curve that may be not coming as strong as expected, you sort of get hear that from suppliers and you hear that from OEMs. Understanding that you guys are sort of in the product development phase, but do you hear any of this from your end of JDA partners in terms of the adoption curve looking for not coming as strong or you can color -- any color you can provide there? Thanks.

Yes. I think, I mean the adoption curves can always be impacted by, for example, the economy and then 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 the Tesla and NIO, they are very much committed to EV adoption. So there might be some impacts by the economy and other factors. But in terms of the battery road maps, 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.

Yeah, Shawn, that's a really interesting question. So all the work that we are doing with the EV OEMs in A-sample and B-sample, building up the line, improving the quality, improving the cell design, the safety, the performance. Almost all of that get transferred to the eVTOL. Because eVTOLs, the urban air mobility need all the parameters that the EV OEMs require. The safety actually, even more rigorous safety requirements, the cell design, the quality, they need all of that. And then what's better is that for the OEMs you have -- I mean even though the EV OEMs are very committed to lithium-metal, you still have the incumbents like LG, CATL, Samsung, SK, the big companies that are very much invested in the EV space. Whereas for eVTOL, it's blue ocean. And then some of the bigger companies are less interested in the eVTOL because the near-term market -- they think the near-term market is smaller. But then for us, for next-gen batteries, it's really exciting, for example, say one eVTOL is about two cars in terms of batteries, right? So in the EV B-sample, we build 10 cars worth of batteries. That's just the B-sample for EV. But 10 cars worth of batteries, that's by eVTOLs worth of batteries. If we supply five eVTOLs worth of batteries to the likes of Joby And Archer, the eVTOLs companies, then that's actually considered commercial. And the volume is smaller, but then the margin, the economics are much more favorable. And also, it's a new market. So the standards have not been set yet. And then we have the opportunity being the first mover in lithium metal for eVTOL, we have the opportunity to set the standards. And once you set the standards, then the FAA or Europe, yes. Then they will adopt the standards. Then our lithium metal could be the first FAA-certified lithium metal battery for UAM. And then once we set the standards, then we influence the next five, 10 years of certification process in this field. So the impact is really big.

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?

Absolutely, absolutely. And then I mean, we love working with the EV companies, but then those companies tend to be bigger, right? And then the EV companies are more entrepreneurial and more like-minded and similar size. And we work together and we share data, and we also tune our business model to fit what the market wants. So it's actually a really exciting market and eVTOL is actually happening much faster than we expect. I mean next year, the summer Olympics, one eVTOL company will do a demonstration fly. And then several cities around the world are, do you need to have these eVTOLs demonstrations. So it's actually happening much faster.

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, you feel very comfortable that you've got everything that you need at this point going forward.

Yes, yes. So 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. A question on the transition to B-samples with the auto OEMs. Is there a way to assess how far behind? It sounds like you have kind of one kind of a front-runner that you're very close with. Is there a way to assess kind of how far out the other two are relative to the first one? And is having one, assuming you get across the finish line, getting one to B-sample, does that kind of give you guys an ability to nudge the others since there's some third-party validation? Or is that not really relevant as you guys have -- as you guys see OEM seeing it?

Yes. Good question. So actually, the spec's transition from A to B for all the thee OEMs and actually all OEMs around the world are quite similar the performance and the 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, probably 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 focus 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 talk 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 years forward? Or is it pretty similar from what you guys have seen historically?

Yes. So the OEMs have sort of modified their focus, remember from range anxiety to maybe safety to maybe cost. But then in terms of technology platform, the OEMs have not really changed their commitment because, for example, lithium metal, it came in one range. But then it can also mean lower cost because a longer-range battery, if you keep the range the same, then the battery is actually smaller. So you pack -- the packaging can be actually cheaper. So lithium metal can actually be designed so that it can mean longer range or lower cost to fit the OEM's target.

Understood. Great, thank you for the time.

Thank you.

[Operator Instructions] 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.

Yes. So also cover the landscape. The first one in terms of how you put lithium foil down as the anode. There's about three main techniques for putting down lithium foil. And then one is execution, as you take the thicker lithium foil and then execute it’s like a pasta maker, execute it to a thinner foil and then you laminate onto your turn collector. And then another is physical deposition, basically inside the chamber, you evaporate lithium and then that falls onto your substrate. And then third is [slurry] (ph) coating. You can take the lithium powder, you make a slurry and then you coat it and then you drive off the solvent. And there's pros and cons to each of the technique. I would say, the most mature currently is the extrusion and then lamination. That's by far the most mature process for putting down tin lithium foil. And there are disadvantages to that, for example, it's hard to make the foil wide, but we have an internal process for making the foil wide. And then that's why we're able to make the large format 100 amp hour lithium metal cells. And then the other is in the extrusion and the lamination process for now. But we are actively testing the other two approaches, because the other two approaches may offer long-term advantages over the extrusion and lamination process. And for example, maybe in a year to 18 months, we might switch to the other processes. And will keep the industry updated. So -- and for us, the different process basically comes down to which one gives the best metrics in terms of cost, manufacturing efficiency, and performance. And then your second question about composite coating. So the composite coating serves two purposes. One is to improve safety, secondly, to improve the cycle life and we can't really get into the details of exactly what material we use. And the industry has different types of coatings and there's different ways and different places in the cell that you can put on the coatings. So I can't really get into the details, but it's basically used to improve safety and then prevent internal shorts and also to improve cycle line.

Our next question comes from Bimis Hugh from -- it's a Private Investor. Bemis, your line is now open. Please go ahead.

Good morning. Thanks for taking my questions. My question is -- so previously, you have mentioned that A-sample JDA includes different cathode chemistry in addition to high nickel. Has any progress been made in other chemistry other than high nickel, such as 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 and 5 are very similar. Line 4 is for EV, but then it's 10 cars of batteries a year, and that's considered B-sample for EV. Line 5, we can make 10 cars or 5 eVTOLs worth of batteries per year. But that's considered commercial because in EV, no OEM will give you an order for 10 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 help us set the standards in the industry. Clear, Line 5 will be for eVTOLs…

So if that's the case will there be 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.

Yes. So thanks, everyone, for tuning in and also supporting us. And it's not been easy for us to get to this point, and we're very close to entering B-sample for EV applications and then all the solid foundation that we've built with EV OEMs, we plan to definitely continue to work with our EV OEMs, and we continue to have a very good relationship and partnership with them. At the same time, we plan to take this solid foundation that we built, modify it for eVTOL applications. It's a totally new field. It's a field that's happening much faster than we expected and is the field that, like I mentioned earlier, lithium -- we really believe that in this decade, 2020, lithium metal is going to enable eVTOL the same way that lithium-ion enabled consumer electronics 30-years ago in the 1990s. So it's a really exciting field for the future of transportation as well as lithium metal batteries. So I really appreciate everyone's support. Thank you.

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