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spk01: Thank you for standing by and welcome to Inovix Corporation's fourth quarter and full year 2021 earnings conference call. Currently, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. As a reminder, today's program will be recorded. It is now my pleasure to introduce your host for today's program, Charles Anderson, Vice President of Investor Relations. Please go ahead, sir.
spk04: Thank you. Hello, everyone, and welcome to Inovix Corporation's fourth quarter and full year 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 you that we released our Q4 and full year 2021 shareholder letter after the market closed today. It's available on our website at ir.anovix.com. A replay of this conference call will be available later today on the investor relations page of our website. Please note that the 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 based on current expectations and may differ materially from actual future events or results due to a variety of factors. For a discussion of factors that could affect our future financial results in business, please refer to the disclosure in today's shareholder letter and our filings with the Securities and Exchange Commission. All our statements are made as of today, March 3, 2022, based on the information currently available to us. We 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 except as required by law. During this call, we will also discuss non-GAAP financial measures, which are not prepared in accordance with generally accepted accounting principles. you can find a reconciliation of these non-GAAP financial measures to the GAAP financial measures in our shareholder letter, which is posted on the investor relations page of our website. I will now turn the call over to Harold to begin. Harold? Thank you, Charlie.
spk05: Good afternoon, everyone. We're looking forward to updating you on our progress today. We do so with a heavy heart, given the current situation in Ukraine. Our thoughts are with those affected by the ongoing conflict, including our employees from Ukraine and those with friends and family from the area. While Inovix does not currently have direct business ties to the region, today we are thinking of the people at Antonov Airlines, a Ukrainian airline who helped us deliver critical factory equipment from Asia to San Francisco in the spring of 2021 to mitigate supply chain disruptions. Without this hardworking crew from Ukraine, we would not be where we are today. We remain grateful for their assistance, and our thoughts are with them, their families, and their loved ones during this difficult time. 2021 was quite the year for Inovix, one that validated the technical and commercialization strategy we have pursued since our founding. We enter 2022 with ever-increasing demand for our batteries, which we believe offers the highest energy density for the mobile computing market. And most importantly, we are on track to begin commercializing in the coming months. Our shareholder letter posted on our website details our accomplishments in 2021 and our focus for 2022. Let me call out some of the highlights here, then Stephan will do a review of the financials. After that, we'll take your questions. In January, we began shipping production qualification samples from our automated production line at Fab One in Fremont to customers. By doing so, we continue to expect recognizing first product revenue in the second quarter of 2022. Hitting this significant milestone will distinguish us from competitors who claim technology breakthroughs but are years away from commercialization I want to thank our entire team and especially our operations group for bringing up our first line at Fab 1. It was by no means an easy task. Indications of demand for our battery remain well above what we can supply for several years. Our revenue funnel increased by roughly $200 million sequentially in Q4 2021 to $1.5 billion. End markets and applications continue to be broad-based, but we would highlight incremental contribution to the revenue funnel from new industrial applications and new engagements in Asia as a result of additional resources we are devoting to the region. The speed by which we can capture this demand comes down to how fast we can qualify customers, improve our manufacturing process, and bring on capacity. We have generated a tremendous amount of learning from bringing up our initial production line, and immediately fed this into designs for our next generation equipment. These designs will enable lines that are faster, smaller, more energy efficient, and ultimately lower cost. First, in response to increased customer engagement and demand for custom cell designs, we will soon order a next generation pilot line based on these learnings in order to speed customer qualification. Second, we also plan to order in the coming months the first of our next-generation production lines based on these same learnings. This line will allow us to bring additional capacity online for revenue by the middle of 2023. It has long been our view that the proper time to scale up is when we have optimized our manufacturing process and believe our next-gen lines give us the best opportunity to do just that. Our shareholder letter also details important third-party validation. Notably, we were an Innovation Award honoree at the Consumer Electronics Show in January, quite an achievement considering the 1,800 products evaluated by an elite panel of judges. We further strengthened our balance sheet with the redemption of our outstanding public warrants, which has added another $130 million. I'm pleased to announce two recent data points that demonstrate our progress in commercializing our battery for the electric vehicle or EV market. Today, we are announcing the addition of Patrick Donnelly as Vice President of Strategic Business Development, focused on EVs. Pat joins us from Samsung SDI, where he led a commercial team that secured several multibillion-dollar contracts for lithium-ion batteries with both established auto OEMs and emerging EV OEMs. Also, today in our shareholder letter, we are showing updated progress on our Department of Energy program to demonstrate our 3D architecture and 100% active silicon anode with an EV class NMC cathode. As many of you know, low cycle life is one of the killer problems that has held back the adoption of 100% active silicon anodes. We believe the Inovix 3D architecture uniquely solved this problem, and we are happy to report that these cells are approaching 800 cycles and only have lost 4 percent of their capacity. These are very encouraging and exciting results, and we look forward to updating you as they progress. Please be sure to read our shareholder letter for more details on these significant achievements. Now, I will turn the call over to our CFO, Stephan, who will discuss our financials. Stephan?
spk02: Thank you, Harold. Our detailed financials can be found in our shareholder letter. So I will spend my time covering a few high-level topics. We closed the first quarter of 2021 with net cash of $385.3 million, which does not include the incremental $52.8 million of cash we received in January from the remaining exercise of our public warrants. Turning to the fourth quarter results, we did not recognize product revenue in the quarter. consistent with our expectations. As Harold mentioned, we continue to expect to begin recognizing product revenue for the sale of our batteries in the second quarter of 2022, consistent with our previously reported goal. Our operating expenses in the first quarter were $24.8 million. Excluding stock-based comp, our non-GAAP operating expenses in the quarter were $20.8 million, up from non-GAAP operating expenses of $16.2 million in the third quarter of 2021, which also excludes stock-based comp. The sequential increase was the result of our efforts to scale up the business for manufacturing and commercialization to meet demand from our customers. Turning to the full year 2021 results, we used $95.3 million of free cash flow, which included $43.6 million of capital expenditures. Cash use came in below our forecast of $110 million to $120 million due to timing of equipment payments, some of which slipped into early 2022. Now let's discuss our expectations for 2022. As noted earlier, we expect to recognize our first product revenue in Q2 2022. For full year 2022, we expect to generate revenue between $6 million and $12 million. We expect that our revenue will consist of both product revenue and non-recurring engineering or NRE service revenue. Keep in mind, that in addition to producing sales for product revenue, our alliance will also be heavily occupied this year producing qualification samples to support future revenue ramps. For full year 2022, we expect to use between $190 million and $210 million of cash, of which we expect roughly 55% will be CapEx. As Harold mentioned earlier, we are bringing on a next-gen pilot line in 2022 to respond to the need for increased customer qualifications. We are also continuing to build out FabOne and will order our next-generation production line. Not surprisingly, like the rest of the industry, we are not immune to the inflationary pressures impacting battery production equipment given the surge in demand for lithium-ion batteries. To summarize, we enter 2022 with a very strong balance sheet and are investing to commercialize our groundbreaking 3D battery architecture, which uses 100% active silicon anode. We are focused on executing our plan, which we believe will drive shareholder value. I will now turn it back to Harald for closing remarks. Harald?
spk05: Thanks, Stephan. To recap, we made outstanding progress in 2021. We are now building and shipping batteries to Tier 1 customers. In 2022, our priorities will be responding to a growing customer base, driving transformative product enhancements, and improving our manufacturing process based on alertings from Fab 1. With that, we are ready to take your questions. Operator? Thank you.
spk01: As a reminder, to ask a question, you'll need to press R1 on your telephone. For your questions, please use the pound key. Please stand by while we compile the Q&A roster. Our first question comes from Colin Rush with Oppenheimer. Your line is open.
spk07: Thanks so much, guys. Can you talk a little bit about the number of customers you've gone through the full qualification on for moving into the designing phase? And then I have a follow-up question around capacity expansion.
spk05: Yeah, Colin, thanks for that question. This is Harold. You know, we ship our qualification samples for our first customer, and we're working on qualification samples for others right now. You know, as we mentioned in the comments earlier, we expect to start recognizing revenue from one of those customers in the second quarter of 22. Okay.
spk07: And then, you know, you talked about the capacity expansion, but clearly demand is running at a pretty healthy clip. I'm curious about your thoughts on potentially doing a slightly larger facility as you decide on this next space and how far along you are in terms of identifying that location and potentially entering into an agreement you can talk about.
spk05: Yeah, yeah, thanks for that comment. You know, as you mentioned, we're seeing an increasing and growing demand for our product, both across products and customers, and obviously we want to translate that into revenues as fast as possible. You know, as you actually think of this, one of the things we're actually starting to think about is whether we need to establish an earlier global footprint for how we manufacture. And so we're basically, you know, right now we're evaluating both domestic and overseas locations to do that. You know, the other thing I would say is, in addition, you know, we've had such valuable learning off our first production line And that's really given us the opportunity to design a next generation line that is more efficient in terms of throughput and capital and floor space. And, you know, we're really looking at what's the best way to move the company forward and how do we expand. And both of those, you know, have a factor on kind of what type of facility and where we want to locate it. We remain, you know, actively engaged with one of the largest real estate firms that's out there. They specialize in manufacturing sites. And, you know, we've been working on it for quite a while, and we actually have submitted a couple LOIs on several candidate properties already. So I think stay tuned for that. You know, we expect to, you know, move forward soon with this first next-gen line, and then after that, you know, announce a location for it.
spk07: That's super helpful. Thanks so much, guys.
spk01: Thank you. Our next question comes from Anthony Stoss with Craig Hallam.
spk03: Hey, guys. Harold, I'm curious, with the new process that you identified, you've talked about it being more efficient and faster, et cetera. Will that raise the potential revenue in plant one when it's up and operational and cranking? And then follow-up question, you know, the 35 customers that you highlighted you sampled to, how much is that up from the last quarter? And can you give us a sense of kind of what markets, is there any new markets that you're sampling into?
spk05: Yeah, thanks for the questions. So first question was – sorry, repeat. Line one capacity. Line one capacity. Yeah, so I think certainly to the extent these new lines are more efficient from, you know, from a footprint, you know, utilization space, that gives us an opportunity to increase the capacity here should we choose to. I think we're looking at, you know, where we put capacity a bit more broadly here. you know, thinking about where our customers are. So, you know, we may decide to add more capacity here. We might decide to add more capacity somewhere else. I think that's an active discussion we'll go through. Ultimately, I would just think about how do we install enough aggregate capacity, you know, in our locations to satisfy the customer demand, and I think we're going to be flexible about that and really look at what makes the most sense for the business and our customers. Your second question, if you... Sorry, if you could repeat that, I'd appreciate it.
spk03: Yeah, the 35 customers that you sampled to, how many you had last quarter and if there's any new markets.
spk05: Yeah, so I would say the funnel continues to grow impressively. It grew roughly $200 million during the quarter. I think growth is both broad across all the markets we've been targeting already and But I think we've also seen some new interest in a couple segments. One is the industrial market, where energy density has a pretty high value prop as well. And so that's one area which I think is new relative to what we've been seeing in prior quarters.
spk03: I could just sneak in one other quick one, just again on the new process. Is there brand-new equipment that you haven't dealt with in the past, and is there any kind of material additional lead times? I'm curious when you think you can have everything in and qualified for the new process.
spk05: Yeah, I think it's a combination. I think in some cases these are improvements on equipment with existing vendors, right, where we've learned enough. We know we can make a much better piece of equipment. In some cases we're looking at some new vendors as well. We're pretty far along in those discussions. So from a lead time standpoint, we have a good sense of what those are. and we believe that we'll have that first next-generation line on the ground at a facility sometime in the first quarter next year and have it producing revenue the second quarter, which is consistent with what we've been saying for the last several quarters. Very good. Thanks, Harold. Thank you.
spk01: Thank you. Our next question comes from Derek Soderberg with Collier Securities. Your line is open.
spk06: Hey, guys. Thanks for taking my questions. So just on the second production line at Fab One, you know, you guys started putting that in, I think, late in last quarter you were talking about it, so late in the year. I guess what inning are we sort of at with that line, and do you expect that second line to be fully up and running and ready to ship battery cells by the end of the year, or what's sort of the timeline for that one? And will that one be using, that second line be using the new manufacturing equipment or not? And, you know, should that second line at Fab One be sort of the last line using the prior generation equipment? Sorry, that was kind of a lot there.
spk05: That's okay. So you're right. We have two essential production lines here in the Fremont facility. One has been here longer. It's the one that has produced the qualification cells that we shipped in January, which will be in production in the second quarter. The second one is a bit behind time-wise. It landed later. And its big role this year, you know, if you think about kind of through the summer, is doing qualification work for some of the larger cell products. And we do expect that towards the end of the year when that qualification work is done, you know, that line will be available for doing production deliveries. But I would say that from a true revenue standpoint, most of the revenue work will be done on the first line because it's the one that's actually producing the product we're qualifying right now with our customers. And then your second question is, is line two kind of the last of the current generation? Yes. I would say the answer to that is yes. There is some additional equipment coming in to support that, but overall I would say Gen 1 is kind of what we have. There are a few more pieces showing up. We've done is use all the learning on that, which has been super valuable. In fact, I would say we're more than pleased in all we've learned because it really helps us to design a next generation line that is quite a bit better. and we're excited to turn that into these next lines that we can really grow the company with.
spk06: Got it. And then as my follow-up, you guys spoke to sort of prioritizing customer qualifications and improving your manufacturing equipment ahead of scaling capacity. You know, it doesn't sound like that priority is changing the timeline to Fab 2, timeline to revenue there. Just curious, if that relates to, you know, that commentary is related to your JV licensing strategy and just trying to sort of bulk up the, you know, the throughput of the equipment. Is that a good way to think about some of that commentary?
spk05: Yeah, I would think a little bit about the partnership stuff as being on a parallel track, right? I mean, we're squarely focused on getting the production lines that we've built ourselves unknown to, you know, hit their goals and then, you know, working on a second generation line. At the same time, obviously, we're talking. We do talk on a somewhat regular basis with customers and potential partners for how we could grow faster. A key piece of that is our Fab 3 strategy, which is what we've talked about, which is further out in time and geared maybe more towards the EV space because we feel that approach to JV or license is the right way to enter that market. And so with the addition of Patrick Donnelly, we talked about, he'll be someone who's actually going to be helping have some of those conversations with the players in that space to try to push those discussions forward.
spk06: Perfect. Thanks, guys.
spk01: Thank you. And our next question comes from Gabe Dow with Calwin. Your line is open.
spk08: Hey, guys. Thanks for taking the questions. Maybe just back to the manufacturing capacity and capabilities. I think Harold, initially FAB1 was expected at scale to deliver 45 million cells a year. Just curious, how many lines did that assume? And then, you know, just because it's just trying to get a sense of, like, how much product you could actually deliver today from the lines that you have today.
spk05: Yeah, so thanks for the question, Gabe. So, you know, certainly we – we've talked about our ability to significantly ramp the capacity here. That's beyond the two lines that are in place, and that would be something we would do in the future, you know, certainly consistent with our strategy for these next generation lines, maybe the generation beyond the ones we have right now. I would say that, you know, our decision to increase the capacity here, we'll judge over time as we look at how our Fab 2 strategy rolls out, right, and whether it makes sense to do you know, more here, less here, and more at some of these other locations. I think we want to be flexible on that with respect to where our customers are and what the opportunities are for these other locations. So I think we'll adapt dynamically, and I'm sure whatever we would say today is probably slightly different than what we'll end up executing on. Ultimately, we just want to make sure we can deliver the overall capacity to meet our customers' needs.
spk08: Understood. Thanks, Harold. And then maybe shifting gears a bit and just looking at some of the cycle life data you showed on the EV battery, could you just talk about, you know, I know there's a target as part of the DOE program to get to, you know, watt hours per liter, a figure of 700. Could you just talk about what the energy density is on those cells on a watt hour per kilogram and if EV partners are more interested in the gravimetric or the volumetric energy density?
spk05: Yeah, I would say there's interest in both, you know, from a customer standpoint. You know, it turns out that in cars today, in some ways, the space is as valuable as the weight. You know, the specific cells that we've built now are not super aggressive from an energy density standpoint. That's somewhat on purpose because the objective was to establish the long-term cycling capability of our unique 100% active silicon atom architecture and I think thus far the data on that is pretty exciting. And I would say that, you know, people would struggle to show active silicon stuff in the past that looks this good. So we're excited about that. You know, we do believe that if we were designing, you know, true high energy cells, you know, for that market, we could have a compelling product either from a volumetric or specific gravity standpoint. And, you know, we have some data out on our website that talks about what that might look like.
spk08: Thanks, Harold. And then just curious, as those cells have cycled now and hit close to 800 cycles, how much did they swell? Was it still like less than 5%?
spk05: Thanks. Yeah, I would say in general with the architecture and our unique constraint system, you know, we see very little actual swelling of the batteries.
spk08: Got it. Thanks, Harold.
spk01: Thank you. As a reminder to ask a question, that's star 1. Our next question comes from Sean Milligan with Williams Trading. Your line is open.
spk09: Hey, guys. Thanks for taking my question. You know, as you look to build out the EV sales process, I know you're bringing on Patrick. Just curious if, you know, he's brought in with him, how that team is going to build out over the next year or two.
spk05: So, yeah. I would say it's – I don't know the answer to those questions yet. Patrick is just coming on board, and I'm sure he has some thoughts on how to build that stuff out. I would like for us to make some comments. I kind of have that organ to shave stuff, you know, over the next several quarters. But to be honest, I don't have the actual answers to all those in front of me right now.
spk09: Okay. And then on the EV side – With the DOE program, I think you're testing NMC technology, if I'm correct. Have you, you know, sampled any cells with EV players with other technologies to this point?
spk05: Yeah, so what we've done in the past, you know, is we have four kind of standard sizes of batteries today, which are kind of targeted more for the consumer electronics space. And so we've sampled cells from those suite of batteries into the EV space already. those tend to have a lithium cobalt oxide cathode as opposed to NMC. But it gives the customers in that space a good sense for what our technology is capable of and how it performs. And so that's something we've been doing over the last, you know, half year, if not longer.
spk09: Okay. And then, you know, one last question, I guess, around the – you mentioned 35 customers that you've sampled cells to – Just kind of curious if you're able to talk to a win rate that's in that product pipeline, and then maybe, you know, how long you're seeing it take from sampling to first revenue.
spk05: I don't have the figures off the top of my head, and I don't think we've commented specifically on how many is in each part of the funnel. I would say that – Our ability to move people into the part of the funnel is really more driven by our ability to engage with the kind of demand we're seeing. One of the things that we're actually doing this year, which I think is a pretty big initiative, is we're spending some capital to put in place a whole next-generation pilot line, which is roughly ten times the throughput of the line we have right now. So obviously the raw horsepower to deliver samples to customers is much better. It's also going to be highly flexible, so our ability to deal with lots of custom designs is significantly better. And then one thing that's also super exciting about that is that it's really designed around kind of the same production kernels as the next-gen manufacturing line. And the hope there is that we can cut some of the qualification time out with our customers by having something that really reflects what manufacturing looks like and and not have to go through multi-step qualifications for products. So we think all of those things will increase our ability to drive stuff to the bottom part of the funnel and also reduce our time to market with some of these customers. So that's a pretty big initiative. We think it's a real critical thing the company is doing, which will give us an advantage going forward. And the pilot line is mid-year? Yeah. it'll be coming in the end of this year, right? So I would look at towards the end of this year that starting to have a significant effect on how fast we can engage with customers and move people down and also give us a promise to be quicker in terms of, you know, converting opportunities into actual revenue.
spk09: Okay, great. And then just one more, in terms of the early customers that you've had, and sort of the land expand strategy? Are you starting to see customers sample sales across different product lines or, you know, I know like maybe you would have sampled with one product initially and now they're starting to bring you into other products.
spk05: Yeah, I would say in general, you know, we've had increase in terms of customer traction across multiple customers, but even within specific customers, we're starting to talk with customers about follow-on products to the initial products already. So those discussions are happening, which is, I think, a very encouraging sign for kind of their view of our relationship. And, you know, obviously, one of our decision factors around customers, since we can't necessarily service everyone, is to pick customers where there is kind of that extending life and we can, you know, we can ride with these customers through multiple evolutions of products. And we're starting to see that stuff materializing.
spk09: Okay, great. And the cycle life on the EV, what's the target that, like, what's the target that we should look for? If you're approaching 800 now, what's the number of cycle lives that you need to get to?
spk05: So the stated goal that the DOE set out in this program was 1,000 cycles. Right now we're just short of 1,000 cycles to 20% fade or 80% initial capacity. Right now we're sitting just short of 800, and we've got only about 4% capacity fade. So we're pretty encouraged of those results, and we think we'll have additional good news to report on that later.
spk09: Great. Thank you for your time. Thank you.
spk01: Thank you. And I'm currently showing no further questions at this time. I'd like to hand the conference back over to Mr. Russ for closing comments.
spk05: Thank you, everybody, for your time today and listening to our earnings call. We're super excited of where we're going and the progress we've made this past year. You know, this has been a long journey for this company to really fundamentally change how batteries are made, and we think – We've proven a lot of that. Shipping qualification samples out of our first production line is a huge milestone for us that we think differentiates us from many others in the battery space that talk about technologies but have yet to commercialize. And we realize that reducing things to practice and making a product is ultimately what it's all about. We've got a product that works. We've proven we can make it. We've got customers that are lined up to take it. We think that's a great position to be in. So we're very excited. We look forward to informing you about our progress going forward. You know, we have every employee in the company runs around with their badge, with a list of our core values, but also the vision for this company. And that vision is that every person is positively impacted by Inovix innovation every day. And we're dead set to make that happen, and we're excited about the journey we're on and the progress we're making. And we look forward to having you along for the ride.
spk01: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone have a wonderful day.
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