Enovix Corporation

Thank you for standing by and welcome to the NLX Corporation second quarter 2021 earnings conference call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1 on your telephone. As a reminder, today's program may be recorded. And now I'd like to introduce your host for today's program, Charles Anderson, Vice President of Investor Relations. Please go ahead, sir.

Thank you. Hello, everyone, and welcome to Inovix Corporation's second quarter 2021 results conference call. With us today are President, Chief Executive Officer, and Co-Founder, Harold Rust, and Chief Financial Officer, Stefan Pitska. Harold and Stefan will review the operating and financial highlights, and then we will take questions. After the Q&A session, we'll conclude the call. Before we continue, let me kindly remind that we released our shareholder letter after the market closed today. It's available on our website at ir.inovix.com. A replay of this conference call will be available later today on the investor page of our website. Please note that our shareholder letter, press release, and this conference call all contain forward-looking statements that are subject to risks and uncertainties. These forward-looking statements are only predictions and may differ materially from actual future events or results due to a variety of factors. A novice can give no assurance that these statements will prove to be correct, and we do not intend and undertake no duty to update these statements. We will also discuss certain forward-looking non-GAP financial measures which are not prepared in accordance with general accounting, except for the accounting principles. We urge you to review the discussion of our non-GAP financial measures and the risks and uncertainties associated with our business that are described in the Safe Harbor provision for forward-looking statements in our shareholder letter and in our filings with the Securities and Exchange Commission. I will now turn the call over to Harold to begin. Harold?

Thank you, Charlie. I want to welcome everyone to our first results call as a public company. In mid-July, we completed our business combination with Rogers Silicon Valley Acquisition Corp. This was a major development for us and for the whole lithium ion battery industry. The net proceeds of $382 million from this transaction provides us with the capital to fund the scale-up of two advanced lithium ion battery cell production facilities and commercialize our breakthrough 3D silicon lithium ion battery technology. I want to thank everyone involved for their intense effort over the past few months to get the deal done. I also want to highlight that on our first trading day, we hosted our advanced battery production showcase. Over 60 investors and analysts attended in person, and more than 300 joined the live webcast. Since then, over 2,000 have watched the webcast replay. We are humbled and excited by the interest in our story, which we think is one of the most compelling in our industry today. Now let's discuss our second quarter and touch on the highlights of our shareholder letter, which discusses in depth our results, strategy, progress around validation and production, and supply chain. After I am finished, Stephan will cover our financial performance and outlook. A key highlight is our go-to-market strategy. We remain committed to our strategy of initially focusing on the premium mobile computing battery market, which we forecast to be $13 billion by 2025. This market encompasses computing, mobile communications, and wearables, including smartwatches, headsets, and the emerging markets of augmented reality and virtual reality, also known as AR, VR. In the second quarter, we began shipping technology qualification samples from our pilot line to our initial launch customers in these markets. Additionally, we have met key battery performance specifications for our initial customers. We anticipate shipping final customer qualification samples from our first production line by year end, with production following in the first quarter of 2022 and revenue in the second quarter of 2022. Customer demand today remains very high for our products. At the end of Q2, the potential annual revenue of all programs, either in the active design or design win phase, reached $292 million. These represent programs that are through technology evaluation and design work has begun. In the case of design wins, the customer is funding a custom battery design or qualifying one of our standard batteries for a formally approved product. We have also identified an incremental $881 million of engaged opportunities, which we define as a potential annualized value of projects where a customer has deemed our battery a match for their product and is evaluating our technology. Altogether, our revenue funnel is $1.17 billion. To meet this growing demand, we are accelerating efforts throughout the company to scale. For example, we have accelerated hiring. In the first half of the year, we grew our headcount by 43% to 184 employees, which included several key additions to the leadership team. Now I'd like to discuss our progress on our first production line. As many of you saw during our showcase last month, we are on track to start production at Fab 1 in the first quarter of 2022, resulting in product revenue in the second quarter of 2022. Last quarter, we were able to navigate the global supply chain constraints and receive all key equipment for our first production line. This required heroic efforts, including a critical decision to charter an Antonov AN-124, one of the world's largest cargo planes, to fly over 60 tons of manufacturing equipment from Asia to San Francisco. We managed industry-wide supply chain challenges and installed and started qualifying our equipment in the midst of a global pandemic. Now let me turn the call over to Stefan, our CFO, who will discuss our financial results. Stefan?

Thank you, Harold. Our detailed financials can be found in our shareholder letter. I will focus on a few high-level topics. Before I do, I want to remind everyone that our business combination with Rogers Silicon Valley Acquisition Corp closed on July 14th. As a result, our second quarter financials presented today do not include the updated cash position or share count reflecting the business combination. On cash, we raised net proceeds of $382 million from this transaction, which we received on July 14th. The same day, we repaid our $15 million bridge loan. Our balance sheet post-business combination is very strong, and we believe allows us to fund the scale-up of two advanced lithium-ion battery production facilities. On share count, there were 145.2 million shares outstanding as of July 14th. This does not include 17.5 million warrants with an exercise price of $11.50. Turning to the second quarter results, we did not recognize product revenue in the quarter, but we do expect to begin recognizing product revenue from the sale of our batteries in the second quarter of 2022. Our operating expenses in the second quarter were $14.2 million. Excluding stock-based comp, our non-GAAP operating expenses in the quarter were $12.1 million, up from non-GAAP operating expenses of $9.8 million in the first quarter of 2021, which also excludes stock-based comp. We are accelerating our efforts throughout the company to scale given the tremendous demand we are experiencing for our products. Through June 30th, we have used $35.7 million of free cash flow, $20.6 million of which was used for CapEx. For full year 2021, we expect to use between $110 million and $120 million of free cash flow, of which roughly half will be CapEx. Beyond hiring, we are also adding factory capacity, design capacity, investing in intellectual property, and creating a global footprint to support our customers. To summarize, we entered the second half of 2021 with a strong balance sheet, and we are investing to establish a leadership position in our industry. We are now focused on executing our plan, which we believe will drive shareholder value. I will now turn it back to Harold for closing remarks. Harold?

Thanks, Stephan. To recap, we made considerable progress in the first half of 2021, equipping our first advanced 3D silicon lithium ion battery production facility. I want to thank our entire team for their dedication and effort. We are singularly focused in bringing our first-of-a-kind manufacturing line to volume production. We enter the second half of 2021 with significant financial resources, strong customer demand, a world-class team, and a breakthrough technology in a critical market that unpicks all of our lives every day and is strategically important to the global economy. I want to close by welcoming all our new shareholders. We appreciate your support and our dedicated driving shareholder value. With that, we are ready to take your questions. Operator?

Certainly, ladies and gentlemen, if you have a question at this time, please press star then 1 on your touchtone telephone. If your question has been answered and you'd like to remove yourself from the queue, please press the pound key. Our first question comes from the line of Colin Rush from Oppenheimer. Your question, please.

Thanks so much, guys. You know, I realize that you just finished installing all the equipment on tab 1, but I'm curious about where you're at with Fab 2, if you can give us a sense of where you're at with slight selection and any sort of deposits that you've been able to put down on long-term items.

Yeah, Colin, this is Harold. Thanks for that question. So, you know, as you know, we've gone through a down selection process over the last six months or so, and we're progressing in due diligence with some opportunities there that we think are good choices. I think those discussions are going quite well. and we believe that there's a deal to be had that will be good for the company, good for our shareholders. You know, we need to be hoarding equipment for that factory in the first half of next year, and I would expect that, you know, sometime before then you'll see some public announcements about what that deal will look like.

Okay, that's helpful. And then in terms of the number of customers that are in that funnel that are testing cells at this point, can you give us a total number of customers and how many are testing at this point?

Yeah, I would say there's roughly 20 customers or so. Maybe north of that we're actively engaged with right now. And, you know, we're actively sampling to additional customers beyond that. The funnel's pretty broad. We're not short at all for people that want to test our cells. And so we're actively trying to increase the diversity of that funnel and customers and products.

And then just the final one around the customers, reserving slots in the factory is actually a pretty big benchmark in our view. Can you give us a sense of how many other folks are looking at considering those sorts of commitments to you guys on the sales side?

Well, we made an announcement you probably saw today with a customer in the wearable space that's put down a capacity reservation that's worth up to about $20 million. I think we're starting to have discussions with other customers as well. I don't think I can comment specifically about others that might be getting close or not close to that. I think certainly You know, our view is we've got a technology and an energy density advantage that you can't find anywhere else. And so I think over time, you know, we may see people more motivated to try to lock up capacity because I do think we'll be a scarce commodity. Great. Thanks so much, guys. Thanks, Colin.

Thank you. Our next question comes in the line of Derek Suddenberg from Hollywood Securities. Your question, please.

Hi, guys. Thanks for taking my questions. I wanted to start with the qualification and the commentary around that. It looks like, you know, you guys have plans to ship production qualification samples in Q4. So it sounds like we should expect that entire assembly line to be operational by then. Is that correct? And, you know, are the production qualification samples you expect to ship, are those going to be based on production that's fully automated? or will you still sort of rely on quite a bit of manual labor there?

Yeah, thanks for the question. So you're right. Fourth quarter of this year is when we start delivering qualification samples. At that point, those products will be made in an entire automated fashion. So, you know, there will not be humans actually doing any of the processing. The line, you know, that we put together here is essentially set up that way. So, you know, what we're delivering to customers will be the same thing they'll be receiving next year when we're in volume production.

Got it. So it sounds like you guys haven't been able to do sort of a full dry run of production yet, but I guess you've probably been testing, you know, the individual steps on the production line. I guess as you look at the latest capacity test, you know, how is your proprietary equipment sort of stacking up against your expectations on capacity, you know, better or worse, any detail around that would be great.

Yeah, I think we're pleased overall in terms of the equipment and its ability to do its intended function. You know, we actually started working on the equipment probably two years ago in some ways. And so, you know, there's been a lot of work that's gone to do with this, a lot of proof of concept work, some pilot tools that we did. So, you know, we had pretty high confidence going in. And I think in general, the tools that perform to specifications, you know, we have a pretty rigorous set of both factory and site acceptance things we have to go through. And, you know, I would say there's no red flags there. We're pretty excited about the tools being able to deliver to the intended specs. And, you know, it's a real significant improvement from, as you mentioned, you know, stuff in R&D is a bit more manual in nature. And I think the level of quality of the parts we're going to make is going to be quite high out of this new line. So we're pretty excited about it.

Awesome. Thanks. Thank you. Our next question comes from the line of Gus Richard from Northland. Your question, please.

Yes, thanks for taking the question. Just real quick on the sales funnel, you've got $292 million in active designs and design wins. Can you give us a sense of how much is active and how much is design wins?

You know, I don't have the breakout right in front of me. I think, you know, there's significant amounts in both of those sections, and obviously what, you know, we're trying to do is, you know, push those down from design wins to, you know, into actual purchase orders, and that's really the focus of the company. And I think, you know, over the next six months, that's probably what you should look for from us is as we convert these things into, you know, firm purchase orders, we'll make some announcements around that.

Got it. That makes sense. And the 292 is above the rated capacity of FAB 1. Will you need FAB 2 to realize that revenue, or can you get that out of FAB 1?

Well, you know, FAB 1 and FAB 2 both – grow in size over time. I mean, the nameplate capacity of FAB1 when it's fully ramped, I think, is 228 million, something like that. So in principle, we have more demand than we can satisfy. I would expect that some of that demand in that part of the funnel, you know, will come out of FAB2, and that's why, you know, that project is super important, and we're spending a lot of resource on it as well as FAB1.

Got it. And then just in terms of FAB2, you know, it's What we're seeing is people go to more regional supply chains because of pandemics and trade wars and natural disasters. I was wondering if you're giving any consideration to, you know, how you set up your capacity globally. Do you need, you know, FAB2, is it more important for you to be in Asia? Or, you know, any color on that would be helpful.

Yeah, I mean, it's kind of a multidimensional problem, right? I mean, there's a bunch of considerations from, you know, cost of workforce to security of your intellectual property to, you know, trade issues. You know, one of the things that we've done for FAB1, which might also help us in FAB2 depending where you locate it, is we've We've built the company with a foreign trade zone. So essentially from a kind of a tariff and duty standpoint, we're exempt from those to the extent those products leave the U.S. and go back. And so that gives us a lot of flexibility in terms of where we locate Fab 2. But there's a matrix of parameters we're looking at in the final selection for Fab 2. And it's hard to handicap those because each option has got different attributes. But I think we're pretty firm in picking what we think is the best choice for the shareholders.

Got it. And then last one for me on the work you're doing with the military. Can you give a little bit more color to that? Is this just investigating higher capacity batteries for military applications? And is there an expectation that that will ultimately lead to revenue down the road?

Yeah, I think we're pretty excited about that program. I mean, I think we kind of view that as a new market for us outside of our initial markets. You know, soldiers themselves carry about 15 pounds of batteries each. There's kind of a standard building block battery. Obviously, having a battery of higher energy density allows them to carry, probably they'll carry the same weight, but they're going to have more time so that, you know, so much of what they do is, you know, their sensors and their You know, everything about them is electrified, so that's super critical. You know, we actually see this being a very important market for us going forward. And, you know, this is more than an evaluation. This is really, you know, delivering sales to them that, you know, we hope will turn into and we expect will turn into a significant amount of revenue for the company as we get into the middle years.

Okay. And remind me, how long is that contract you signed?

You know, I'll be honest, I don't recall the length of the contract, but, you know, there's some near-term deliverables over the next year we're going to be building cells for them to try out. One other point I'll just mention, you know, obviously if you're a soldier in the field and you're getting shot at, you know, the robustness of the batteries is also important. And, you know, one of the things you probably recall is our batteries encased in stainless steel. And so there's some advantages from a robustness standpoint as well that is very interesting to the Army, in addition to obviously just the energy density.

Great. Thanks so much for taking the questions.

You're welcome.

Thank you. And as a reminder, ladies and gentlemen, if you have a question at this time, please press star then 1. Our next question comes from the line of Sean Milligan from Williams Trading. Your question, please.

Hey, thanks for taking the questions this afternoon. In the shareholder letter, you mentioned some advancements you've made on the EV front, and I was wondering if you could expand on that in terms of maybe a discussion about the types of partners that you're working with. Are they automakers or pack and module players, and how you see that progressing over the next several years?

Yeah, thanks for that question. You know, I think we've got a multi-pronged approach there. You know, we are – engaged with actual auto companies as well. We're also talking with component suppliers, pack suppliers, like you said, into that space. You know, there's multiple ways to enter that market, and we want to basically engage with all those. So we're sampling cells into various parties along those spaces to have them evaluate our technology. We're also in parallel executing a three-year program with the Department of Energy and which revolves around essentially building our cells with the more standard EV chemistries, materials that are in their batteries, to demonstrate the performance with the actual material set you use. And we're pretty bullish and optimistic about that. Our view is that we'll push both these efforts over the next year, And our goal is that by, you know, sometime next year, we'll announce, you know, development agreements with specific companies in those spaces. And that leads to, you know, obviously more serious engagements and supporting us, you know, becoming a supplier into that space by 2025. Okay, great.

And also, if we spend a second talking about ARVR, you have the customer that's know trying to reserve or has reserved capacity in the plant and just curious within the 13 billion tam you know what percentage of that is arvr and just based on discussions you're having with uh you know people in that space is there upside to that figure and like when do we start to realize the upside to that figure over the next couple years

Yeah, you know, I would say the AR space is interesting, right? It's an early stage technology now, but one that kind of the mavens in consumer electronics believe could be huge and actually, you know, essentially almost be as ubiquitous as cell phones down the road. The timing of that, I think, is not completely certain, even from those mavens. And so, what they're doing now is essentially the groundwork to build those development products and platforms. Batteries are super challenged in that area, and a number of players have said the only battery that they see that gets them to where they need to be is ours, and so we're super excited to be working with people in that space. In terms of the $13 billion that ARV is, probably it's a pretty small portion of that, My guess is probably going to end up being a lot higher. The question is, you know, how soon before 2025 does it happen? And I think, you know, that's maybe anybody's call. I would say that, you know, these customers in these spaces are making some pretty big bets and investing lots and lots of money to make that happen. And so it's quite possible that could pull in and be a significant portion of the market and also a significant business for us in the years ahead.

Great. And just one more. Earlier you answered questions about, you know, the timing of equipment for Fab 2 and when that needs to be ordered. In terms of the ramp that you're projecting on the raw material side, have you signed, you know, takeaway agreements with suppliers of raw materials? Or how should we think about that in terms of the supply chain?

Yeah, so we've been pretty active executing supply agreements this year. Our general philosophy is multiple supply agreements so that we've got, you know, some redundancy of supply on our critical materials, and so we've been pretty successful at that. You know, and these are staggered over time in terms of how much material we need. You know, we're not a huge consumer in 2021. We get to be more significant, sorry, in 2022. You know, we're a bigger consumer in 2023. I don't foresee any issues, you know, getting access to those materials over that timeframe. And certainly, you know, we'll continue to negotiate those into bigger supply agreements as FAP2 comes online. I think we're pretty happy with that. You know, we've picked, I think, kind of industry leaders, and we've picked materials which are very high-volume runners. So we're trying to, to some extent, kind of ride coattails with what the industry is using and not try to be trailblazing in that respect.

Great.

Great. Thank you for taking the questions.

My pleasure.

Thank you. Once again, if you have a question, please press star then 1. And I'm not showing any further questions in the queue at this time. I'd like to hand the program back to Harold Rust for any further remarks.

Well, thank you for everyone attending our earnings call today. We appreciate your attendance. You know, we're super excited about the company. the direction we're heading and the progress we're making. We are singularly focused on bringing up this first-of-a-kind battery line to satisfy our customer needs, and we're excited to share with you all the progress towards that end as the year progresses and create shareholder value for everyone. So thanks again for your attendance.

Thank you, ladies and gentlemen, for your participation at today's conference. This does conclude the program. You may now disconnect. Good day.