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Item 7. Management’s Discussion and Analysis

2024-02-27 compared with 2023-03-16 · 83 added, 85 removed, 134 unchanged (56% of the section changed)

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The following discussion may contain forward-looking statements that reflect our plans, estimates and beliefs, which are subject to risks, uncertainties and assumptions.

We are engaged in the development and production of high-performance, Lithium-Metal (“Li-Metal”) rechargeable battery technologies for electric vehicles (“EVs”), electric vehicle take-off and landing (“eVTOL”) and other applications.

Our third-party tested, differentiated battery technology has been designed to combine the high energy density of Li-Metal with the cost-effective, large-scale manufacturability of conventional Lithium-ion (“Li-ion”) batteries and will help to promote the transition from the global dependence on fossil fuel-based automotive vehicles to clean and efficient EVs.

These forward-looking statements within the meaning of the federal securities law are based on our current expectations and beliefs concerning future developments and their potential effects on us.

These forward-looking statements are not statements of historical fact and may include statements regarding possible or assumed future results of operations.

There can be no assurance that future developments affecting us will be those that we have anticipated.

Our actual results and the timing of events may differ materially from those expressed or implied as a result of various factors, including those set forth in the sections titled “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements.” 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.

(“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.

We are a pre-commercialization stage company engaged in the development and production of high-performance, Lithium-Metal (“Li-Metal”) rechargeable battery technologies for electric vehicles (“EVs”), Urban Air Mobility (“UAM”), which encompasses electric vehicle take-off and landing (“eVTOL”) technology, and other applications.

Our differentiated battery technology has been designed to combine the high energy density of Li-Metal with the large-scale manufacturability of conventional Lithium-ion (“Li-ion”) batteries and will help to promote the transition from the global dependence on fossil fuel-based automotive vehicles to clean and efficient EVs and help enable an era of electric transportation in the air.

Our mission is to facilitate the widespread adoption of sustainable electric transportation, both on land and in air, by creating best-in-class, high energy density Li-Metal batteries centered around long-range performance and safety.

To assist in achieving this mission, we have partnered with leading global original equipment manufacturers (“OEMs”), GM, Hyundai and Honda, among other strategic partners, under joint development agreements (“JDAs”) to jointly develop and produce our Li-Metal battery cells and technology.

We are also conducting research and development activities to further improve the performance, quality and cost of our battery technologyby focusing on the following key areas, all of which we expect to help us achieve our commercialization goal, at our facilities in Woburn, Massachusetts in the United States, Shanghai, China, and Chungju, South Korea.

To assist in achieving this mission, we have partnered with leading global original equipment manufacturers (“OEMs”), General Motors (“GM”), Hyundai Motor Company (“Hyundai”), and Honda Motor Company, Ltd.

(“Honda”), among other strategic partners, under joint development agreements (“JDAs”) to jointly develop and produce our Li-Metal battery cells and technology.

We have transitioned from the development and production of A-Sample batteries to B-Sample batteries with specifications required by OEMs for their EVs.

This transition began when we signed a B-Sample agreement for Li-Metal development of EVs.

A-Sample batteries are functional prototypes developed for OEMs based on their technical specifications.

These are in contrast with B-Sample batteries, which are A-sample batteries manufactured under much higher throughput and tested in actual vehicles, and C-Sample batteries, which would be fully functional, mature samples for mass production and tested for full drivability in actual vehicles.

We are also conducting research and development activities to further improve the performance, quality and cost of our battery technology by focusing on the following key areas, all of which we expect to help us achieve our commercialization goal, at our facilities in Woburn, Massachusetts in the United States, Shanghai, China, and Chungju, South Korea.

These areas include:

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 our current cell design from three to nine Ah capacity to 50 Ah and 100 Ah.

We are developing processes and upgrading equipment to scale up the manufacturing of our current cell design from three to nine Ah capacity to 50 Ah and 100 Ah.

● Module and Pack Design :

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Our active development efforts are focused on the integration of our Li-Metal cells in modules to enable our Li-Metal cells to perform as intended once they are integrated into modules and vehicles.

● Advanced Artificial Intelligence (“AI”) Software and Battery Management Systems (“BMS”) :

● 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.

We continue to develop AI algorithms to diagnose battery cell-related health issues, develop control algorithms and charging methods to enhance cycle life and safety, and port such software on to a BMS that could be integrated into a battery pack.

● Advanced Materials and Coatings :

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We continue to explore methods of recycling that are productive and cost-effective.

During 2022, we continued to work towards developing and initially producing A-Sample batteries with specifications required by our OEM partners for their EVs.

Our efforts resulted in 7 and 18 newly granted patents and trademarks and the construction of our pilot facilities in Shanghai, China and Chungju, South Korea.

The Shanghai pilot facility was ready-to-use in March 2022 and fully operational in the third quarter of 2022, while the Chungju pilot facility ready-to-use in September 2022 and fully operational in the fourth quarter of 2022.

As we plan to transition the development and initial production of our Li-Metal batteries from A-sample to B-sample in 2023, we expect to significantly increase our headcount and the footprint of our research and pre-production pilot facilities by expanding our existing facilities and entering into new facilities.

As a result, our materials consumption and the rate of cash utilization, as a function of time, will increase significantly.

We continue to make improvements to our two A-sample production lines, one in China and one in South Korea, which are producing large 50 Ah and 100 Ah Li-Metal cells.

We expect to convert our third EV A-Sample production line dedicated for making cells for UAM applications.

In addition, we expect to launch our fourth and fifth production lines in 2024, which will be dedicated to B-sample EV cells.

Furthermore, in June 2023, we entered into a new lease for a facility near our Woburn facility where we have built an electrolyte foundry, which we started using in January 2024.

This facility will focus on novel electrolyte molecule discovery and synthetic pathway development.

As the joint development of Li-Metal batteries with our OEM partners continues to progress, we transitioned from A-sample to B-sample battery development in the last quarter of 2023.

We expect that this will lead to an increase in our headcount and footprint of our research and pre-production pilot facilities as we expand our existing facilities and enter into new facilities.

After B-Sample, we plan to transition to C-Sample in 2026, which we then expect to enable us to commence commercial production of our technology in 2027.

As the joint development of Li-Metal batteries with our OEM partners continues to progress, we also expect to launch future research facilities and, eventually, commercial production manufacturing facilities in the United States.

Finally, we expect to explore opportunities for partial vertical integration, both upstream and downstream, to ensure scalability of our battery and battery technology.

We expect this transition to commercial production to lead to future research facilities and, eventually, commercial production manufacturing facilities in the United States, which will significantly increase our materials consumption and the rate of cash utilization over time.

Finally, we expect to explore opportunities for partial vertical integration, both upstream and downstream, to ensure scalability of our battery cells and battery technology.

Upstream, we intend to explore integrating vendors of key materials of our cells and providers of key equipment and engineering capabilities, such as cell assembly, anode processing, chemical processing and safety testing.

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Results of Operations

The discussion of our results of operations for the year ended December 31, 2021 can be found in Exhibit 99.2 Management’s Discussion and Analysis of Financial Condition and Results of Operations under our Amendment No.

1 Form 8-K (the “Super 8-K Amendment”) for the fiscal year ended December 31, 2021 filed with the Securities and Exchange Commission on March 31, 2022, which is incorporated herein by reference.

The discussion of our results of operations for the year ended December 31, 2021 can be found in “ Part II, Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations ” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 filed with the Securities and Exchange Commission on March 16, 2023, which is incorporated herein by reference.

Factors Affecting Operating Results

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 to date, have spent $42.2 million, $31.5 million, and $9.4 million on research and development activities, which is prior to credits received by our OEM partners under the JDAs, and have incurred net losses of $51.0 million, $31.3 million, and $13.9 million for the years ended December 31, 2022, 2021 and 2020, respectively, and had an accumulated deficit of $145.3 million and $94.3 million from our inception through December 31, 2022 and 2021, respectively.

We have not generated any revenue from sales to customers to date, have spent $53.9 million, $42.2 million and $31.5 million on

research and development activities, which is prior to credits received by our OEM partners under the JDAs, and have incurred net losses of $53.4 million, $51.0 million, and $31.3 million for the years ended December 31, 2023, 2022 and 2021, respectively, and had an accumulated deficit of $198.7 million and $145.3 million from our inception through December 31, 2023 and 2022, respectively.

Our historical results may not be indicative of our future results for reasons that may be difficult to anticipate and our ability to generate revenue in the future that is sufficient enough to achieve profitability will depend largely on the successful development of our products.

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.

During 2021 and 2022, we were subject to challenging conditions stemming from the COVID-19 pandemic.

Previous spikes in COVID-19 cases in Shanghai resulted in government-mandated temporary shutdowns at our Shanghai facility 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 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.

See “Risk Factors” in Part I, Item 1A of this Annual Report on Form 10-K for further discussion of the possible impact of the COVID-19 pandemic on our business.

The following table sets forth our historical operating results for the periods indicated:

The following table sets forth our operating results for the periods indicated:

Operating Expenses

Years Ended December 31,

Year Ended December 31,

(in thousands)

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Research and development expenses for the year ended December 31, 2023 increased $2.7 million, or 9.7%, to $30.7 million, compared with $28.0 million for the year ended December 31, 2022.

The increase primarily resulted from a $8.2 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 $6.3 million of stock-based compensation expense that primarily relates to restricted earnout shares issued as part of the Business Combination in February 2022 and restricted and performance stock units issued in April 2022.

Further, there was a $4.5 million increase in software development costs related to our advanced AI software and BMS, a $1.8 million increase in facility costs due to rent, utilities and depreciation expenses, and a $1.4 million increase in expenses for lab consumables and material supplies.

These increases were partly offset by a $3.2 million increase in credits to research and development expense, which are amounts invoiced pursuant to the JDAs, and a $0.3 million decrease in fees associated with external consulting.

We expect research and development expenses to significantly increase in 2023 compared with 2022 as we attempt to develop a battery cell with acceptable performance, yields and costs due to expansion of our science, engingeering, and technician personnel and investments in additional plant and equipment for product development, building prototypes and testing of battery cells.

The increase primarily resulted from a $9.1 million increase in personnel costs mainly attributable to our growth in headcount to support our operations.

Further, there was a $5.1 million increase in facility costs due to rent, maintenance, utilities and depreciation expenses, a $3.3 million increase in expenses for lab consumables and material supplies to support activity in our research and pre-production facilities, a $1.1 million increase in professional fees and consulting costs, and a $1.5 million increase in other lab related services.

These increases were partly offset by a $2.8 million decrease of stock-based compensation expense that primarily related to the completion of the derived service period and the accounting for forfeited awards for the earn-out shares during 2023 , a $2.5 million decrease in computer and software development costs due to a change in project specifications and timelines , a $1.4 million decrease in JDA pass through costs, and a $10.7 million increase in credits to research and development expense from billings to our JDA partners .

We expect research and development expenses to significantly increase in 2024 compared with 2023 as we attempt to develop a battery cell with acceptable performance, yields and costs due to hiring, materials, engineering, and technical staff for product development, building prototypes and testing of battery cells.

General and Administrative

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Upon commencement of commercial operations, we also expect to incur customer and sales support and advertising costs.

General and administrative expenses for the year ended December 31, 2022 increased $35.1 million, or 213%, to $51.6 million, compared with $16.5 million for the year ended December 31, 2021.

This increase primarily resulted from a $17.5 million increase in personnel costs mainly attributable to our growth in headcount to support our operations as a public company, which included $11.9 million of stock-based compensation expense that primarily relates to restricted earnout shares issued as part of the Business Combination in February 2022 and restricted and performance stock units issued in April 2022.

Further, there was a $7.5 million increase in insurance expense to cover potential liabilities under our indemnification obligations to our directors and certain officers of the Company, a $4.6 million increase in fees associated with external consulting, legal, marketing, public relations, audit and accounting services, a $3.4 million increase due to deferred offering costs associated with the Business Combination, a $1.1 million increase in facility costs due to rent, utilities and depreciation, a $0.6 million increase in travel costs primarily related to the opening of the South Korea facility, and a $0.4M increase in computer and software related costs.

We expect general and administrative expenses to increase in 2023 compared with 2022 due to expansion of our personnel headcount to support our growth and operations as a public company.

General and administrative expenses for the year ended December 31, 2023 decreased $4.1 million, or 8.0%, $47.5 million, compared with $51.6 million for the year ended December 31, 2022.

This decrease primarily resulted from a $3.7 million decrease in insurance expense due to lower premiums incurred to cover potential liabilities under our indemnification obligations to our directors and certain officers of the Company compared to the prior year period, a $3.5 million decrease in transaction costs incurred in the prior year as a result of the Business Combination completed in February 2022 with no comparable costs in the current year period, and a $1.9 million decrease in marketing and public relations expenses due to a decrease in promotional events compared to the prior year period .

These decreases were partly offset by a $3.0 million increase in personnel costs mainly attributable to our growth in headcount to support our operations as a public company, $0.7 million increase of stock-based compensation expense that primarily relates to our annual grant of RSUs and PSUs issued in April 2023, and a $1.3 million increase in professional fees related primarily to increased accounting and audit related expenses, legal fees to support our operations as a public company, and recruiting and consulting services .

Non-Operating Items

Interest Income, Net

Interest Income

Interest income primarily consists of interest earned on our cash and cash equivalents, which are primarily invested in money market funds, and short-term investments in marketable securities, which are invested in U.S.

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During the year ended December 31, 2023, we had interest income of $16.7 million compared with $6.2 million for the year ended December 31, 2022.

This $6.0 million increase was primarily due an increased investment in money market funds, a shift of a portion of our investment portfolio in the current year from cash and cash equivalents to higher yielding investments in U.S.

treasury securities, and a general increase in interest rates during 2022.

Change of Fair Value of Earn-Out Liability, Net

During the year ended December 31, 2022, we incurred a $25.4 million gain associated with the change in fair value of the Sponsor Earn-Out liability.

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.

See “Note 11 – Sponsor Earn-Out Liability” to the consolidated financial statements for additional information.

Other (Expense) Income, Net

During the year ended December 31, 2022, we had other expense of $1.8 million, compared with other expense of $0.3 million for the year ended December 31, 2021.

This $1.5 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 note 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 and South Korean won.

Provision for Income Taxes

Income tax expense was $1.3 million on pre-tax loss of $49.7 million for the year ended December 31, 2022 compared with an immaterial income tax expense on pre-tax loss of $31.2 million for the year ended December 31, 2021.

This $10.5 million increase was primarily due to an increased investment in marketable securities and higher interest rates during 2023 when compared with 2022.

Change of Fair Value of Sponsor Earn-Out Liabilities

During the year ended December 31, 2023, we incurred a $6.8 million gain compared with a $25.4 million gain for the year ended December 31, 2022 associated with the change in fair value of the Sponsor Earn-Out liabilities.

This $18.6 million decrease in gain on the change in fair value of the Sponsor Earn-Out liabilities is tied to SES’s stock price.

See “Note 11 – Sponsor Earn-Out Liabilities” to the consolidated financial statements for additional information.

Miscellaneous Income (Expense), Net

During the year ended December 31, 2023, we had miscellaneous income of $0.4 million, compared with miscellaneous expense of $1.8 million for the year ended December 31, 2022.

This $2.2 million decrease in miscellaneous expense was primarily the result of the accounting for certain postemployment benefits recorded in the prior year, partially offset by unrealized and realized foreign currency loss primarily due to the strengthening of the Chinese renminbi and South Korean won compared with the U.S.

Benefit (Provision) from Income Taxes

Benefit from income tax was $0.9 million on pre-tax loss of $54.3 million for the year ended December 31, 2023 compared with income tax expense of $1.3 million on pre-tax loss of $49.7 million for the year ended December 31, 2022.

Our effective tax rate was 1.6% and (2.5)% for the years ended December 31, 2023 and 2022, respectively.

The difference between our effective tax rate and the U.S.

federal statutory rate of 21% was primarily driven by non-recognized deferred tax benefits due to a full valuation allowance.

See to “Note 18 – Income Taxes” to the consolidated financial statements for additional information on our income tax expense.

federal statutory rate of 21% was primarily driven by deferred tax benefits and release of valuation allowances from foreign jurisdictions.

See “Note 18 – Income Taxes” to the consolidated financial statements for additional information on our income tax expense.

Liquidity and Capital Resources

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The following table provides a summary of our cash flow data for the periods indicated:

Years Ended December 31,

Year Ended December 31,

(in thousands)

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As we continue to ramp up hiring for research and development headcount to accelerate our engineering efforts, we expect our cash used in operating activities to increase significantly before we start to generate any material cash inflows from our operations.

Net cash used in operating activities of $46.5 million for the year ended December 31, 2022 was primarily attributable to net loss of $51.0 million, as adjusted for a gain on change in fair value of Sponsor Earn-Out liability of $25.4 million, stock-based compensation expense of $22.8 million, depreciation and amortization expense of $2.6 million and accretion income from available-for-sale short-term investments of $2.4 million, partially offset by a $6.4 million working capital inflow.

Net cash used in operating activities of $56.4 million for the year ended December 31, 2023 was primarily attributable to net loss of $53.4 million, as adjusted for non-cash operating items such as stock-based compensation expense of $20.6 million, accretion income from available-for-sale short-term investments of $11.1 million, a gain on change in fair value of Sponsor Earn-Out liabilities of $6.8 million, and depreciation and amortization expense of $5.5 million.

These non-cash operating items were combined with a $11.1 million working capital outflow.

The working capital outflow was driven primarily by a $8.2 million increase in prepaids and other assets, a $1.5 million increase in receivable from related party, a $1.1 million increase in deferred tax assets, a $0.1 million decrease in accrued expenses and a $0.2 million increase in inventories, partially offset by a $0.1 million increase in accounts payable.

The increase in prepaids and other assets was primarily due to insurance costs to cover potential liabilities under our indemnification obligations to our directors and certain officers, license fees for software, advance payments for research agreements, and VAT taxes.

The increase in receivable from related party was driven by activity from a JDA.

The decrease in accrued expenses and other liabilities was primarily due to adjustments for fixed assets in accruals at period end, accrued income taxes payable, payroll related accruals and the accounting of certain postemployment benefits.

The increase in inventories was driven by current purchases with limited consumption of materials.

The increase in accounts payable was primarily due to an increase in accounts payable related to the purchase of property and equipment for the South Korea and Shanghai facilities offset by a decrease in vendor payables.

Net cash used in operating activities of $46.5 million for the year ended December 31, 2022 was primarily attributable to net loss of $51.0 million, as adjusted for a gain on change in fair value of Sponsor Earn-Out liabilities of $25.4 million, stock-based compensation expense of $22.8 million, depreciation and amortization expense of $2.6 million and accretion income from available-for-sale short-term investments of $2.4 million, partially offset by a $6.4 million working capital inflow.

The working capital inflow was driven by a $6.8 million increase in accrued expenses and other liabilities and a $5.5 million decrease in receivable from related party, partially offset by a $4.0 million decrease in accounts payable and a $1.6 million increase in prepaids and other assets.

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The increase in prepaids and other assets was primarily due to insurance costs to cover potential liabilities under our indemnification obligations to our directors and certain officers.

Net cash used in operating activities of $30.0 million for the year ended December 31, 2021 was primarily attributable to net loss of $31.3 million, as adjusted for stock-based compensation expense of $4.6 million, depreciation and amortization of $1.7 million and gain on the forgiveness of the PPP note payable of $0.8 million, partially offset by a $4.2 million working capital outflow.

The working capital outflow was primarily driven by a $7.9 million increase in receivable from related party and a $1.7 million increase in prepaids and other assets, partially offset by a $4.1 million increase in accrued expenses and other liabilities and a $1.3 million increase in accounts payable.

The increase in receivable from related party was driven by activity from a JDA.

The increase in prepaids and other assets was primarily attributable to prepaid rent and deposits related to the Shanghai facitlity.

The increase in accrued expenses and other liabilities was primarily attributable to increased marketing and public relations activity and a prepayment attributable to a JDA.

The increase in accounts payable was primarily attributable to professional fees associated with external legal, consulting and accounting services.

Investing Activities

Net cash used in in investing activities was $296.0 million for the year ended December 31, 2022, compared with net cash provided by investing activities of $3.3 million for the year ended December 31, 2021.

Net cash provided by investing activities was $32.7 million for the year ended December 31, 2023, compared with net cash used in investing activities of $296.0 million for the year ended December 31, 2022.

Investing activities include purchases of investments, maturities of investments, and purchases of property, plant, and equipment.

The change in net investments activities, combining purchases and maturities, as well as the change in capital spending are discussed below.

Purchases and Maturities of Investments – Net purchases of short-term investments were $48.5 million for the year ended December 31, 2023, compared with net proceeds from maturities of short-term investments of $281.4 million for the year ended December 31, 2022.

The $293.6 million decrease in net proceeds was driven by a shift of our investment portfolio to cash equivalents in the current year.

Capital Spending – Capital expenditures were $14.7 million and $9.0 million for the years ended December 31, 2022 and 2021, respectively, and primarily related to purchases of lab machinery and equipment, lab tools and instruments and leasehold improvements to our facilities

in the United States, Shanghai and South Korea.

The $232.9 million decrease in net purchases was driven by the nature and time to maturity for the treasury securities included in our portfolio in the current year.

Capital Spending – Capital expenditures were $15.8 million and $14.7 million for the years ended December 31, 2023 and 2022, respectively.

These expenditures primarily related to purchases of lab machinery and equipment, lab tools and instruments and leasehold improvements to our facilities in the United States, Shanghai and South Korea.

We expect capital expenditures to significantly increase in 2024 compared with 2023 as we continue to invest in the build out of our manufacturing pre-production facilities and expand into new facilities.

Financing Activities

Net cash provided by financing activities of $289.9 million for the year ended December 31, 2022 was primarily attributable to proceeds received from the Business Combination and PIPE Financing, net of transaction costs and from a government grant.

Net cash provided by financing activities of $184.8 million for the year ended December 31, 2021 related to proceeds received from the issuance of Series D and D plus redeemable convertible preferred stock, net of issuance costs.

In April 2020, we applied for and received $0.8 million in the PPP note.

We received full forgiveness of all our debt under the terms of the program in February 2021 and recorded a gain of $0.8 million in other income in our consolidated statement of operations and comprehensive loss for the year ended December 31, 2021.

As of the date of this filing, we have no debt obligations outstanding.

Net cash provided by financing activities of $3.3 million for the year ended December 31, 2023 was primarily attributable to proceeds received from a government grant and proceeds from the exercise of stock options.

Net cash provided by financing activities of $289.9 million for the year ended December 31, 2022 related to proceeds received from the Business Combination and PIPE Financing, net of transaction costs, and from a government grant.

Contractual Obligations and Commitments

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Operating lease obligations (2)

Total contractual obligations

(1) Purchase obligations include commitments for the purchase of lab supplies and equipment as well as committed spend related to a JDA.

These commitments are derived from purchase orders, supplier contracts and open orders based on projected demand information.

(2) Operating lease obligations represent the fixed lease payments for the noncancelable lease term, fixed lease payments for optional renewal periods where the Company is reasonably certain the renewal option will be exercised, and variable lease payments that depend on an underlying index or rate in effect at lease commencement.

(2) Operating lease obligations represent the fixed lease payments for the noncancelable lease term, fixed lease payments for optional renewal periods where the Company is reasonably certain the renewal option will be exercised, variable lease payments that depend on an underlying index or rate in effect at lease commencement, and future minimal lease payments for executed but not yet commenced lease agreements.

Off-Balance Sheet Arrangements

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We consider an accounting estimate or assumption to be critical when (1) the estimate or assumption is complex in nature or requires a high degree of judgment and (2) the use of different judgments, estimates and assumptions could have a material impact on the financial statements.

Our significant accounting policies are described in “Note 2 – Summary of Significant Accounting Policies” of our accompanying consolidated financial statements included in this Annual Report on Form 10-K.

Our significant accounting policies are described in “Note 2 – Summary of Significant Accounting Policies” of our

accompanying consolidated financial statements included in this Annual Report on Form 10-K.

We consider the following to be our critical accounting estimates.

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Post Business Combination, as our common stock is publicly traded, the fair value of RSU grants is based on the closing market price on the date grants are made .

The fair value of PSU grants is determined through and independent valuation of the likelihood of the performance metrics being met within the terms of the award.

Under the provisions of ASC Topic 718, we determine the appropriate fair value model to be used for valuing share-based issuances and the amortization method for recording compensation cost, which can be impacted by the following assumptions:

The fair value of PSU grants is determined through an independent valuation of the likelihood of the performance metrics being met within the terms of the award.

We determine the appropriate fair value model (Black-Scholes model for Options and RSAs, Monte Carlo simulation for PSUs) to be used for valuing share-based issuances and the amortization method for recording compensation cost, which can be impacted by the following assumptions:

expected term

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Pursuant to ASC 718 – Stock Compensation, we recognize stock-based compensation based on the fair value determined as of Closing with the assistance of management and an independent valuation.

We determine the appropriate fair value model (Monte Carlo simulation) to be used for valuing share-based issuances and the amortization method for recording compensation cost, which can be impacted by the following assumptions:

expected term

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of stock-based compensation expense reported.

Sponsor Earn-out Liability

Judgments and Uncertainties

Effect if Results Differ From Assumptions

Sponsor Earn-Out Liabilities

Certain Sponsor Earn-Out Shares are accounted for as a derivative liability measured at fair value, with changes in fair value recorded in the consolidated statement of operations and comprehensive loss at each reporting period, because the earn-out events that determine the number of Sponsor Earn-Out Shares to be earned back by the Sponsor include events that are not solely indexed to the common stock of the Company.

The fair value of our common stock, which is publicly traded, is used in determining the fair value of the derivative liability at each valuation date with the assistance of management and an independent valuation.

We determine the appropriate fair value model to be used for valuing the derivative liability to record the change in fair value in our consolidated statement of operations and comprehensive loss, which may be impacted by the following assumptions:

We determine the appropriate fair value model (Monte Carlo simulation) to be used for valuing the derivative liability to record the change in fair value in our consolidated statement of operations and comprehensive loss, which may be impacted by the following assumptions:

expected volatility

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If we were to change any of these judgments or estimates, it could cause a material increase or decrease in the amount of earn out liability reported.

Judgments and Uncertainties

Effect if Results Differ From Assumptions

We adopted ASC 842, Leases, with an initial application date of January 1, 2022, using the modified retrospective method with certain optional transition relief.

At the lease commencement date, we recognized a right-of-use (“ROU”) asset and a lease liability for all leases, except short-term leases with an original term of 12 months or less.

The ROU asset represents the right to use the leased asset for the lease term.

The lease liability represents the present value of the lease payments under the lease.

The operating lease liability is equal to the present value of (1) fixed lease payments for the noncancelable lease term, (2) fixed lease payments for optional renewal periods where it is reasonably certain the renewal option will be exercised, and (3) variable lease payments that depend on an underlying index or rate in effect at lease commencement.

Variable lease payments that do not depend on an underlying index or rate in effect at lease commencement, such as common area maintenance, insurance, and property tax, are recognized in operating expenses when incurred.

The measurement of the lease liability depends on the expected lease term with renewal options wherein it is reasonably certain that the renewal option will be exercised.

Because the Company’s operating lease does not provide an implicit rate, the Company estimates its incremental borrowing rate at lease commencement date for borrowings on a collateralized basis over a similar term in a similar economic environment.

If we were to change any of these judgments or estimates, it could cause a material increase or decrease in the amount of ROU asset and lease liability reported.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis