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spk15: Thank you for standing by and welcome to today's program, the Inovix Corporation First Quarter 2023 Earnings Call. After the presentation, there will be a Q&A session featuring Inovix management. With that, I'd like to turn it over to your host for today's program, Charles Anderson, Senior Vice President of Investor Relations and Corporate Strategy. Please go ahead, sir.
spk16: Thank you. Hello, everyone, and welcome to Novix Corporation's first quarter 2023 Financial Results Conference Call. With us today are President and Chief Executive Officer Dr. Raj Tuluri, Chief Financial Officer Stephan Pitska, Chief Operating Officer Ajay Murathe, and Chief Commercial Officer Ralph Schmidt. Raj will give an overview and then we'll take your questions. After the Q&A session, we'll conclude the call. Before we continue, let me kindly remind you that we released our first quarter 2023 shareholder letter after the market closed today. It's available on our website at ir.anovix.com. A replay of this video 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 our current expectations and may differ materially from actual future events or results due to a variety of factors. For 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, April 26, 2023, based on 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 the GAAP financial measures to the non-GAAP financial measures in our shareholder letter. I'll now turn the call over to Raj to begin. Raj?
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spk11: Thank you, Charlie.
spk17: And thank you everyone for joining our call today. I'm delighted to communicate to you that at Enovix we're executing really well and it's been a solid quarter. We did hit a lot of key milestones this quarter. Firstly, we produced 12,500 batteries in our Fab 1 here in Fremont. This is ahead of our forecast of 9,000 batteries that we talked about last time. Now, we also completed a rigorous design approval of our Gen 2 Autoline, and we did this ahead of schedule. We completed the purchase orders for both the high-volume Gen 2 Auto line and also the Agility line, which we will use for sampling our customers for qualifying their products. Now, we also chose a site in Malaysia for our Fab2, and we did this also ahead of schedule. Now, I'm super excited also to tell you that we hired a leadership team there and 25 engineers already, and we see a path for non-dilutive financing of our first production line. Now, I'll expand on that in a moment as we go through the presentation. Then after the quarter, we closed a $172.5 million convertible debenture, which is intended to fund our Gen 2, 2, 3, and 4 auto lines. We did it at a very minimum dilution to our shareholders. Super excited by that offering that we closed. Lastly, this quarter, we made a number of leadership additions, very excited by some really strong people that joined our teams from our previous associations. And now I believe we are totally set up to scale. Now we're already seeing the impact of the people that we have hired with strong progress in all our R&D programs and also in the manufacturing that we're making. Now, format wise, I really wanted to cover two topics today, and then we'll have into Q&A and answer quite any questions you have. Firstly, in the last three months that I've been here, I received most number of questions about about two things, and I'm going to get get to those. The first question was that I've received many times is, you know, why do we believe that our Gen 2 line will be successful and we'll be able to produce millions of batteries and do high volume manufacturing, given that we had some early missteps for Gen 1 production line? So I'm going to talk about that now. Now, I've been here a little over three months, and Ajay has been here about five. And I can tell you, both Ajay and I have tremendous experience for many, many decades in the semiconductor industry. And drawing from that, we have come to the conclusion after looking at our manufacturing, at Dynamics manufacturing process, that these can absolutely scale. And actually, they have some inherent advantages even to making chips. And I'll tell you why here in a few minutes. Now in semiconductors, if you look at manufacturing chips, really there are two processes. There's a front-end process and the back-end process. The front-end process is where you make the wafer fabrication, which is a very complicated process where we use very expensive machines to make the wafers. Then there's a back-end process, which is basically assembly and test. Here you take the dies that are cut into small pieces, and they're small dies, and then you put them in a package. The front end is deep sub-micron manufacturing, and the back-end process is actually a lot more forgiving. Here, the mechanical tolerances to which we have to do are actually in single-digit microns. Now, if you... apply that analogy of semiconductor manufacturing to how Enovix makes batteries, the front end process of the semiconductor manufacturing is very similar to the materials that go into the battery. You know, these are the anodes and the cathodes and the electrolytes and so on. Now, we at Enovix don't manufacture those. We actually buy them from the best suppliers in the world. They come in big rolls of coated electrodes. What we do then is we laser pattern them, we stack them, apply mechanical constraint, and that is really similar to the backend process in semiconductors. Now, there's one big difference. The tolerances to which we have to make these batteries, the tolerances to which we have to design our machines and execute this manufacturing, is in the 50 microns range. As I mentioned, in backend semiconductors, typically this is in the five microns range. So that's kind of a long way of saying it's an order of magnitude simpler problem in mechanical tolerancing. This is why Ajay and I believe is absolutely, we'll be able to do this and we'll be able to manufacture at scale. Now the proof of that is what you're seeing in the operational improvements that you're seeing from us. You can see how we're executing on fab one, you know, continuing to produce thousands of batteries. And we're also hitting all the key milestones on getting the gen two up and running. Now gen two compared to gen one is really all about adding speed, adding speed and automation and parallelism so that we can handle more tasks at once. To give you all a feel for what Gen 2 looks like compared to Gen 1, we made a short video where Ajay describes how this works. And there's a link to the video in the shareholder letter that you received. And it shows you Ajay presenting side-by-side how this work of Gen 1 and Gen 2 machines. I'd encourage all of you to please click on that and take a look at that. It's a short video, but it does really illustrate the point that I'm trying to make here. Now, what is this advantage that Enervix batteries have compared to semiconductors? You know, one of the aha moments for me in the last quarter since I've been here at Enervix is realizing that we can produce higher density and much better capacity batteries with the longer cycle life without having to change our manufacturing process. Now, this is actually very important to understand. Now, in my experience in semiconductors, let's say you wanted to make a higher performance processor or a higher density memory, you pretty much most of the time have to buy brand new machines and go from one process node to the other. And again, these are deep sub-micro lithography machines that cost hundreds of millions of dollars. And sometimes the fab has to be kind of upgraded and rebuilt to really house these machines. What we find at Enavix is that the manufacturing lines we're building, since they're akin to the backend manufacturer, As we make advances in getting better electrodes, better cathodes, better silicon-based anodes, better electrolytes, which we have, our electrochemists are working on sourcing them and making experiments with them. We can use the exact same machines that we are building to make those batteries. In other words, as we make advances in electrochemistry and we make advances in higher energy density, our manufacturing footprint totally scales. It's not like we have to build completely new batteries in new manufacturing facilities every time you want to improve energy density. This is a fundamentally a huge advantage for the way we manufacture batteries. So that is what I believe will make this business ultimately very profitable in the long run. Now, the second major topic I want to talk to you about is the capacity build out. Now, I've gotten a lot of questions on this as I talked to investors over the last quarter. I mentioned last time that we will have multiple options to raise money or get the financing we need to build our capacity. Now, we are now executing towards that. This quarter, we got a non-binding LOI or a letter of intent from our manufacturing partner YBS International in Malaysia. This LOI has YBS working on giving us an existing building space in Penang Science Park to house our high volume manufacturing lines up to four lines with dedicated personnel to staff that line. This is very similar to how we would use a semiconductor backend assembly subcontractor. Now, YBS, in addition to this, is working with a syndicate of local banks to make a significant investment in our Gen 2 Auto line. This is subject to some purchase commitment from Enovix. Now, while we are negotiating all the details, what I can share with you is that we are seeking at least 70 plus million dollars of non-dilutive financing to fund the first line. Now, as I said earlier, this funding is not secured yet, but we are very encouraged by all the discussions we have to date with them. Securing this funding now would alleviate us from spending the $120 million full year CapEx forecast I gave you last time. Now we'll provide an update for you on this in the next quarterly call. Now, beyond that funding, we recently closed the private offering of the $172.5 million convertible senior notes. That gives us the capital we need to make the Gen 2 Autolines 2, 3, and 4. So in other words, we are now set up to be able to build four Autolines in Malaysia in terms of CapEx that we need. Now, let me close with a few remarks here. For the full year of 2023, we continue to expect to produce the 180,000 cells that I mentioned last time, including 18,000 cells in second quarter. Now, once again, we're not forecasting any service revenue at this point because this tends to be episodic and based on milestones. Now I want to reiterate our full cash guidance of $240 million of spend, half from CapEx and half from operationally running the company. We do plan to revise this guidance in our next quarterly call as we get more visibility on the YBS transaction, in addition to our own efforts to internally operate a lot more efficiently. In closing, we're off to a fast start. We are making substantial improvements in Fab One. We're hitting all the milestones we set for ourselves and that I communicated last time to you in our journey to scale in Fab Two in Malaysia. We are working to fund our capacity build-outs while protecting our cash and limiting our dilution. Now, I really want to thank all the InnoVIX employees for their hard work this quarter, along with the investors who actually are supporting us in our efforts. Now, we have a busy year in front of us, but I'm even more confident today than I was when I joined that we have the right product and the right team to achieve our goals and enhance the shareholder value. With that, I will turn it to Q&A.
spk15: This is my comeback. Start yours at purdueglobal.edu. We will now begin the Q&A session. Please note that this call is being recorded. If you have joined via the Zoom application, please use the raise hand functionality to ask a question. If you have joined via the audio line, please press star nine. Questions will be answered in the order they are received. Please ask one question and one follow-up question at most. We will now pause a moment to assemble the queue. Our first question comes from Bill Peterson from JP Morgan.
spk11: Yeah, hi, thanks for taking my question.
spk14: I noticed you said you sampled to 106 customers. I don't recall what the number was in the fourth quarter or even if you stated it, but I looked back and it was like 25 in the in the third quarter of last year. So I guess based on that, how many are our customers you have qualified? How many do you expect to be qualified later this year? And I guess how many of you waiting for post? I guess line two readiness before the qualification would be finished.
spk17: Yeah, absolutely. The question is about customers and customer sampling and qualification. I think Ralph is on the call and he's closest to this. So Ralph, if you want to take that.
spk06: Thank you for the question. So yes, we've seen even a bigger acceleration of the number of customers looking at our product and evaluating the technology. We haven't laid out the exact numbers as you asked for them, Bill. But as you saw in the release, both the active and the design category that we have in our funnel has increased to about $718 million. All the cells we've been shipping over the last few quarters are now in qualification and take, you know, numerous quarters till those qualifications are done. But we're still on schedule exactly how we thought that in the back half of this year, we'll start seeing customers put products into the market with our batteries in them.
spk11: Okay, thanks for that.
spk14: My follow-up question is related to new product development and somewhat related to the prior questions. I guess when do products such as the EX1 to 1.5 and EX2, when do those intercept and I guess get moved to Fab 2? I don't think you mentioned break flow, but similar type of question. When do these get qualified in Fab 2 and then sent to customers for either qualification or I guess ultimately most importantly for high volume production and revenue?
spk17: Yeah, sure. I can talk about that. As I mentioned in my opening remarks, it's really exciting, our manufacturing strategy, that we can continue to improve our process technology and continue to improve the energy density with, as some of you may or may not know, EX1, EX1.5, EX2 are our various products or process technologies that actually improve energy density and cycle life and so on. We are on target on all of those. EX 1.5, we expect to sample towards the end of the year. And we expect to run all those in our factories in Malaysia. Malaysia factory, as I mentioned, will produce samples like in April next year and get into high volume manufacture towards the end of the year. We will continue to run as we make progress in our manufacturing in our process technology. We will run them through our Malaysia factory. And as for break flow, I'm very excited by break flow. It's a phenomenal piece of technology where as you put more and more energy density into batteries, safety is just paramount importance. And break flow is a technology that Inovix has that really provides great safety by not allowing the battery to go into thermal runway. And our line in Malaysia will have break flow integrated when we make these batteries. And in fact, we are sampling batteries with break flow now.
spk11: Thanks.
spk15: Our next question comes from Colin Rush from Oppenheimer. Please go ahead.
spk03: Thanks so much guys separate from the engagement and design activity. Can you speak to the incremental specificity that you've been able to gain on customer needs and adequacy of the current product roadmap to meet those needs as you've gone through the last call it 4 months or so.
spk17: Yeah, I'll make a few comments. And again, I'll ask Ralph to comment on this because he's just a lot closer to it. One thing I found as I visited a lot of customers as I, you know, been spending more and more time here. And as you guys know, the customers we are now talking to are the same customers that I've shipped for many, many years when I was at TI and Qualcomm and Micron and so on. I've got solid feedback from many of them that the battery technology that we have is superior and it produces higher energy density than anything they have today. uh the more now the requirements we're getting are actually a lot more specific you know i i didn't mention that we we hired more people uh i hired uh samira who's actually used to work at qualcomm before who's the head of products reporting to me now she's able to you know along with ralph and his team meet the customers and get more precise requirements on uh How is the battery charged, for example? What voltage is it charged at? What are the different waveforms that are used to charging? Cycle life versus energy density trade-off. Getting more specific on the shape and size of the batteries that fit in wearables versus computers versus phones. So we are getting a lot more detailed, specific requirements. That is really helping us drive a much stronger product roadmap. Ralph, if you want to add more to it, please do.
spk06: Yeah, I think you covered it well, but what I'll say is our expectations has been that the current technology that we have in the line that we're running is really meant to be targeted towards the IoT space and the wearable products. And so we're very, very well aligned with that because we're way down the path. The other markets that Raj mentioned, both mobile and laptop, we've been engaged for multiple almost years at this point with those customers and have their needs as well and their requirements. And we continue to add or slightly change things as we move forward to better address those market requirements. But it's still the same strategy and we're very well aligned with the market needs in each of those kind of, you know, in different stages. Wearables were frankly, you know, close to the production stage. Mobile and laptops are just after that.
spk17: Yeah, maybe just add a little bit more to that. Maybe I'll just add a little bit more to that. The fact that we're able to sample and give a lot more batteries now is really helping us get much better feedback too, because now they are running hundreds of, you know, they have hundreds of batteries from us that they're testing. So the feedback is just much, much more, much stronger. So it's so important to be able to make these batteries now and sample customers.
spk03: Excellent. And then just looking at the ecosystem of equipment suppliers, as you start playing for lines two to four, can you talk about how much opportunity you're seeing for CapEx reduction, optimization, second suppliers, things like that, so that you're de-risking and turning the timeframe on the ramp and the install of that equipment?
spk17: Yeah, let me ask Ajay to comment on that. He's right here.
spk19: okay uh so very good question indeed actually as we start our ramp um as we're going to higher volume production even here in Fab one in Q3 Q4 we have uh a lot of second sources lined up uh under qualification right now uh but that's just for the 180 000 batteries but going forward for the Malaysia factory we have yet you know big uh list of uh second third sources which we have lined up actually uh which we will be qualifying uh going through a rigorous qualification process and then for equipment you you mentioned equipment as well uh equipment what we are doing is we are relying really on the semiconductor uh value chain if you will uh rather than just the battery value chain again you know bringing in that mindset And we localize a lot of that in Malaysia as we set up the high-volume operation there. So both are in works.
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spk11: Thanks so much.
spk15: Our next question comes from Derek Soderberg from Cantor. Please go ahead.
spk07: Yeah, hey guys, thanks for taking my questions. Raj, wanted to start with you. Maybe this one's for Ralph, but I'm curious whether or not, you know, you guys have funding now in place for the four production lines with a more or less certain timeframe in place. Does having that allow for certain customer orders or negotiations to move forward that otherwise wouldn't have?
spk17: I mean, I think what actually has always been in the path of customer orders has been getting enough samples for them to qualify, getting them to be able to test it and say, yes, it looks good in our product, and then getting feedback from them on the right sizes of the batteries, right dimensions, if you will. And that's really been what's in the critical path. And again, that, as I mentioned, we have the agility line coming in November this year, November, December, is when we will be able to sample them. Then we get samples from our high-volume manufacturing line in April, and that will go through the process of qualification of our customers. And we expect those products to go to manufacture late 24 and through 25. So in that sense, that's really the timeline that we have laid out. This fundraise and getting the capital is for us to –
spk07: make sure that we are ready and we have the funding in place to meet that rather than accelerate anything else the timeline will be the natural order of things got it that's helpful um and then as my follow-up uh stephan you know you guys have put out a range of estimates for battery production off the four lines you know you've got an agreement uh with your manufacturing partner i'm wondering if you can update us on how we should think about the longer term gross margin outlook
spk22: So Derek, thanks for the question. We really don't think it has changed on the long range outlook. We still think the 50%, a high profitable business, that is what we are aiming for.
spk17: Yeah, just add a little bit more color to that. If you, you know, and I mentioned this last time, I think it's worth mentioning it again, you know, because I get this question quite often and I want to add a little color. The cost of the battery, you know, 60 to 70% is actually in the materials. I think that's important to understand. And as Ajay mentioned, as we get multi-sourcing in place, as we get to scale where we're making millions of batteries, we see that cost coming down. The cost of the constraint we add on top of that is actually a small piece of it. But with local manufacturing capability in Malaysia and so on, we'll bring that cost down too. And another very important thing, I think, for everyone to see, as I mentioned in my talk, is that the factories we're building will last for quite a long time because we can amortize those over millions of batteries because it is like the backend and test. And I've seen people run the backend as test machines for 10 years even. So it's important to understand that this will be a profitable business. And as Stephan said, we're not changing our outlook on that. It's just really a question of getting to scale.
spk11: Great. Thanks, guys.
spk15: Our next question comes from Gabe Dowd from Callen. Please go ahead.
spk02: Thanks to everybody. Thanks for all the remarks so far. Maybe just going back to the mobile phone and laptop batteries, you noted in the shareholder letter, the focus or go-to-market strategy for majority of this year and next year is on the wearable side in the IoT market. So just curious, when could we expect first revenue being generated by mobile phone and laptop batteries? And could you just remind us where we are on the tech roadmap in terms of cycle life? I think maybe the larger phone and laptop batteries had higher cycle life requirements.
spk17: Yeah, so I think the most important thing to remember here is the timeline, you know, which I laid out, which is we will get samples end of this year from our agility line in the right form factor because the current batteries we make don't fit into laptops or phones in form factor. You know, the small ones and the big ones that we make, they really fit in the IoT space. As we make the batteries that are more specific to phones and laptops, we will get that capability by end of this year. and sampling again in April next year, and then starts the process for our customers to actually start validating them in their own product lines, in their own phones and laptops and so on. That'll take us through, that'll be end of next year. And 25 is when we expect to see revenue from those kind of high volume applications, because that's the time it takes to actually make these batteries in the right form and get the validation and get the qualification from our customers. Now, we will continue to improve energy density, we'll continue to improve our cycle life, and that will naturally intersect with the latest technology we have in 2025 when they get to production.
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spk02: Thanks, Raj. That's helpful. Okay, and then if we could just maybe, or just from my own understanding, make sure I'm thinking about the timing correctly. So Gen 2 Autoline begins to arrive in Malaysia in November this year. So I guess with factory acceptance taking maybe a quarter or two, start of production is... 2Q24 and then still expecting four lines at Fab 2 by 4Q24? Is that how we should be thinking about the ramp?
spk17: No, the way I mentioned that is we ordered one line and that's the line that will be there. You know, as you said, actually the first two pieces, we ordered one line, but we ordered one part of that line in two or twice. So what is called the agility line, which will come here to Fremont in November, December, and the same stuff will go to Malaysia too. The agility line here will help us sample our customers with custom size batteries. Meanwhile, the Malaysia build out happens in Pavlali and the Malaysia build out happens in such a way that April next year, we'll be able to get samples in the Malaysia line. Now we only commented on building one line through 24. We have the ability to build more now that we have the CapEx stuff sorted out, but we will pull the trigger on those as and when we see the right customer demand come in. And the most important thing in running a manufacturing company is to match the supply and the demand. And as the customer qualifications progress, we'll have better and better visibility into when to build that. Now, the one thing that Ajay and team have done is to make sure that the facility that we are, you know, doing in malaysia with ybs has the ability to host all four lines and has the facilitation to run them so we have set up and we also talk to our our suppliers that hey we will probably need much more than one line and you know and so please be ready for it but we're not making any commitments and when exactly we'll pull the trigger on that okay got it got it all right thanks a lot guys our next question comes from alex potter from piper sandler
spk11: Perfect. Thanks very much, guys.
spk04: So I had a question, regardless of how long it takes to ramp, I guess once we're up and fully scaled in Malaysia, I know that there is some nuance here about what exactly a quote-unquote unit is. But in the shareholder letter from today, you mentioned between 38 million and 75 million batteries per year in the aggregate coming out of Fab 2 in Malaysia. If you divide that by four, right, it's between nine and a half million cells and almost 19 million cells per line. So this could be semantics, I know, because there's, you know, there are small cells, there are big cells. But to me, when I first saw those numbers, it seemed like an upward adjustment versus your expectations for per line output versus what you historically said. Is that correct? Or am I reading that incorrectly?
spk19: Again, good observation and good calculations. But let me just direct you towards the way we are designing our lines is the first line is more of a universal line because we have so many engagements with multiple customers. First line would be able to do small and large boats, form factory. In other words, the corner cases are pretty wide. in terms of what can be done on the first. So we, for that, we give up a little bit of capacity on the first line, but second line onwards, it'll be highly optimized towards, you know, a narrower window of the dimensions. And therefore we'll have a lot more capacity per line, which is why when Raj said it in the investor letter, it's between nine and a half to 19 and a half million batteries per line. So you can, you know, depending on, again, the demand and how we match the supply to the demand, that's how you'll get to the number of lines required for the volume that you just stated. That's how I would look at it.
spk04: Okay, that's very helpful. And then maybe the follow-on question to that, Ben, if I wanted to take those unit numbers and translate that into revenue capacity, to the extent you're comfortable talking about this, I know that $5, I've always historically assumed $5 for a wearable and maybe $10 for a cell phone size battery or something like that. Could you take those $5 to $10 unit ASPs and multiply it by the range of those unit numbers and get to something in the neighborhood of 375, 380 million of annual revenue capacity out of Fab 2? Is that in the ballpark?
spk17: Yeah, that's a good first order approximation. Again, it just depends on which ones we sell how much, but that's a good first order approximation.
spk04: Very good. I appreciate it. Thanks a lot, guys.
spk15: Our next question comes from Gus Richard from Northland Capital Markets. Please go ahead.
spk13: Yes, thanks for taking my questions. What run rate do you have to hit in manufacturing before one of your customers commits to production?
spk17: You know, yeah, I mean, it's not that simple as run rate. That's not the only factor that decides. I think the most important thing for our customers is that we be able to, well, let me remind a little bit. There's a lot of customers today that are actually, Ralph is sampling, that are comfortable going to production with our small cells and big cells, and we'll see revenue from them this year and next year. So in that sense, you know, we already have customers who are comfortable going to production with what we're producing. you know the key was to give them enough samples and show that we have enough backlog enough inventory that we can actually meet their demand as they start ramping the product now it depends on the volume of the product you know if the product goes in millions of units we clearly don't have the capacity this year but next year we aim to be able to produce millions of units so i think then customers are more comfortable so it really in large volume customers are more comfortable so it really depends upon the run rate of a particular product right if the product run rate is in the millions we need to have that capability if it's the tens of thousands you know we're ready today so that's kind of like how I look at it and the other variable is we need to give them the battery in the right form factor and shape that they can test it in the product that they're putting it in to be able to come for to be able to say okay you know what I think we should go with this right those are the two big variables
spk20: Williams handles 30% of the nation's natural gas today. And if you think about how important natural gas is in our daily lives, when we get up in the morning to take a hot shower, when we go to turn on the stove to fry eggs, everything that we do, we take for granted. Williams is right there providing that reliable natural gas to both provide those daily services as well as generating the power that shows up as electricity in our homes as well.
spk13: OK, I got it. And then in the first half, you can produce 30K batteries, if I can add two numbers together. And for the full year, you can do 180K batteries. It's a pretty big jump in the second half. Could you just talk about what's going to accelerate that volume just so what needs to happen?
spk17: Yeah, I'll have Ajay comment on that. He lives it every day.
spk19: Absolutely. Again, a very good question. And yes, as you saw in the Q1, we did 12,500. You're saying we'll do 18,000 in Q2, the quarter we're in already. And the ramp is pretty steep. The ramp is driven mostly and the confidence that we are going to get to that ramp is driven by a couple of things, right? One is the yields. And while we don't talk in detail about our yields, which nobody really announces their yields, all I can say is we're making significant improvements in yields throughout the year. And the proof points are sort of behind us, so that gives us confidence about the second half. That's one. Second is uptime. And meantime, between failures of the equipment, right? So essentially, is the equipment getting a little bit more predictable? And both those things, we are making good, solid progress day after day after day, which is what it's giving us. So between now and end of the year, we feel very, very strong that our assumptions are actually fairly accurate and we are going to do the 180,000. Got it.
spk11: Thanks so much.
spk15: Our next question comes from George Giannarikos from Canaccord.
spk10: Hey, everyone. Thanks for taking my question. I'd like to ask about the slides that TJ presented in January that talked about they had red, yellow, and green in terms of just the issues that were needed to be fixed going from Gen 1 to Gen 2. Some of those included, like I see a red line here for bus bar insert, slot fill. And I'm curious if there's any update on any progress that you've made in turning those reds to yellows and those yellows to greens. Thank you.
spk17: Yeah, I mean, I'll give a high-level color. We made significant progress on those. And in fact, I was looking back at that presentation the other day when someone asked me a question, and we're actually on track to almost everything that was said there. And that's the reason why we were able to get the approval to make the purchase order for the Gen 2 equipment, because we made solid progress in each of those. And so I think... Clearly, the team has worked really hard. I mean, Ajay, with all his experience and the team he's brought in, were able to solve most of those issues. So we feel pretty confident about that. Ajay, anything else you want to add?
spk19: Yeah, just very quickly, the way we kind of test that, you know, are we making progress? Are we solving real root causes of what was stopping us from, you know, feeling a whole lot more confident? What we are doing is we are building proofs of concept, right? We introduced that last time in the January 3rd meeting called the POCs. There are several POCs in upwards of three dozen POCs, which were in motion all the way from January, literally January 4th, until you know yesterday i can give you the update most all those pocs are doing extremely well showing us that whatever we assume to confirm the uph that we're expecting are all uh being met so that's how we progress it's a pretty rigorous way of of of approving the next step and the next step etc in the approval cycle as raj mentioned so we're feeling pretty good after the pocs
spk11: Thank you.
spk10: And then just next question is on the notice that you have these two silos that you have in your revenue funnel, and one of them is engaged opportunities that was slightly down sequentially. Is that because engaged opportunities moved into active designs? Is that the right way to think about it?
spk17: Yeah, Ralph, you want to take that? That's kind of my understanding, but Ralph can come on.
spk06: Sure, yeah. Thanks for the question. And yeah, that's the simplest way to think about it is that we're, you know, trying to progress these customers into more active and real design wins. And, you know, that was moving faster than getting new customers into the, you know, front end of that funnel, the engaged part. Really exactly what you want to happen in order for us to get them to a revenue state.
spk11: Thank you.
spk15: Our next question comes from Ananda Barua from Loop Capital Markets.
spk21: Hey, guys. Yeah, good question. Yeah, just a couple if I could. I guess the first is on sort of processing getting Gen 2 and mobility line stood up. Will you be giving us any updates on equipment delivery and any updates you know, kind of through the year on the way to getting them to where you want to be around particular metrics or anything of that nature. And then I have a quick follow-up. Thanks.
spk17: Yeah, we will continue to give you updates in these meetings as we move forward in the different stages and where that is. I think the next big milestone for us is the factory acceptance test, which will come up like in August, I believe. And then after that, we'll have site acceptance when it actually be delivered to our site. So we'll give you updates on both those milestones. But so far, we are really pleased with the progress. And, you know, we get our teams are visiting our suppliers and suppliers come here.
spk21: you know ij and i see this all the time and even yesterday i saw a video of one of our gen 2 machines the newest one working it's pretty exciting very exciting to see the progress being made by the team awesome raj thanks that's helpful uh yeah we look forward to that and and then i guess the the the follow-up question is um what like how how would you like us to think about you know incremental capacity uh and look i know you just you just got malaysia right like in place um and and you're just starting to to get you know sort of just get the purchase orders in waiting for the equipment um but i'm sure we'll start all getting asked as we move forward about you know incremental capacity plans and at some point incremental funding plans you know, like that. So anything you can, you can help us out with context wise around that, we'd be grateful. Thanks.
spk17: Yeah. I mean, as I mentioned, you know, I have a lot of experience in, in, you know, high volume manufacturing businesses. So the most important thing is to make sure your supply and demand are tied out and you don't have too much supply or too little supply and it's aligned with demand, which takes a lot of planning, right? It takes a lot of planning in the demand side with the customers, a lot of planning in when we order the equipment, what are the long lead time ones and facilitation. So it's a complex problem. Both Ajay and I have a lot of experience running this. So the way we're going to do this is first, we secured the funds to make sure that we have the capability to buy them as we need them. Second thing, and now we secured the site and we're in the middle of getting the facilitation done with our partner. And then we give a heads up to our suppliers on when they need to come. And then we start sampling our customers. And, you know, like I said, we are set up for the first four lines now. And as we get to that stage, you know, we will see the progress in the next couple of years, both on the customer side and both on our machines are running. And we will continue to optimize the machines and we'll continue to look to how to expand beyond those four as the demand shows up.
spk21: Okay. Okay, great. That's great. I appreciate it. Thanks a lot.
spk15: As a reminder, if you'd like to ask a question, you may use the raise hand button at the bottom of your Zoom application, or if you've joined us by phone by dialing star nine.
spk11: Our next question will come from Mark Cohodes from Alder Lane.
spk05: mark your line is open feel free to unmute okay thanks for taking my question so raj you've been there for three months and aj a little more than five months what gives you guys the incremental confidence that you can actually manufacture these batteries at speed because everyone constantly hears it's hard to do it's impossible pie in the sky but you're you guys are sounding more and more confident so what what has exactly happened that gives you that confidence that's question one and question two is when are you guys going to start building batteries for inventory to actually ship commercially for these new products thank you
spk17: Yeah, thank you for that question, Mark. You know, firstly, I think, as I mentioned, the reason that we are, you know, increasingly getting more and more confident the more time we spend here is really because of a couple of things I mentioned in the call. The way Enerbix manufactures batteries, you know, is really... like the backend semiconductor manufacturing. It is a backend assembly test kind of technology that we have to master and do. And that technology is there, and many people have done it. And even then, the tolerances to which we need to make is an order of magnitude you know less uh stringent than what's done in chips and uh and and and you can see you know the the progress we're making in the number of batteries we're producing over the last few quarters i mean we went from almost nothing to 4 000 something to 9 000 to now 12 500 and we are coming into 18 000 next quarter so progress we are making in producing batteries as we learn that our understanding of the actual mechanisms and the machines that produce this and the tolerances to which they need to do. I think those are two things that really give us a lot of confidence. And thirdly, all this proof of concept experiments that we've been running were targeted at what went wrong with the fab one when we did it where did we lose yield where did we lose the throughput where did we lose uh you know machine up times and we did some like we created target experiments to make sure that those don't happen in gen 2 and we uh we those experiments proved out and we are confident now we picked a new set of suppliers who are actually very capable of producing machines like this and we are not paying them all the money upfront. So there's a lot of skin in the game on their side because we only paid 10% on the first approval. And then incrementally, we pay the money as the yields come up and as the machine throughput comes up. And there's different milestones that we use to check that. And we followed this well-known process, the EPR process that actually helped us make sure that we're ordering the right machines. So all those things give us a lot of confidence and we feel fairly strongly that we can get this done. And as for your second question on inventory, we are now building, as you know, in this kind of consumer electronics markets, when you start giving units to customers, they want to make sure that if their product is successful, we have the supply to be able to support them. And that's kind of what we are doing through the year. We are, of course, sampling a lot of customers with the batteries we make, but we're also building a reasonable, healthy level of inventory. If the products that our customer launched suddenly start selling really well, we don't want to be in the middle or we want to run with the bottleneck to not be able to supply them with batteries. So it's a responsibility we take seriously and we are handling that. Ajay, anything else you want to comment on the machines?
spk19: Just very quickly on the Gen 2, I think Raj alluded to it, but just from my personal how I feel confident. I'm an operations guy. Data is the only thing that matters. So yield uptime of the Gen 1 is what is giving us the confidence that I told you earlier. But more so in the Gen 2, I personally have visited all the suppliers, all of them who are making these POCs, these machines. Spend good time with them. Look through each of these suppliers, the methodology that they're using to build the machine. Looked at the POCs myself. that is what is giving us the confidence and exactly as raj said you know this is all about back end of semiconductor type of technology uh tolerances etc and now we're seeing the you know the ramp up up you know in the upswing of the ramp that we're you know producing that gives us the confidence thank you very much our next question comes from sean milligan from jenny please go ahead
spk08: Hey guys, thank you for taking my questions. First, I get asked a lot about, you know, who is YBS and what is the background there? And so I know you touched on it earlier, Raj, and that they're used a lot in backend, you know, semi-processing, but can you kind of maybe touch a little bit more on kind of how that relationship came to be about and what gives you confidence in YBS's ability to execute on financing?
spk17: Yeah, so a couple of things. You know, look, I mean, I think if you look at Southeast Asia, you know, there's a lot of contract manufacturers. And we, you know, Ajay has, you know, decades of experience in Malaysia. And I came from Micron that built the last factory in Malaysia on an assembly test of SSDs. So we understand that ecosystem. We understand who the people are that do it well. And, you know, YBS has got a... a good track record of actually supplying, you know, and manufacturing for many, you know, top tier OEMs. And they have that capability. And again, they have the, you know, strong connections to the key people in Malaysia. And, you know, Ajay visited them and they came here. We talked to them and they're a solid company and we feel very strongly that they will be successful. And, you know, so we, We, you know, based on our experience and what everything we've done, I feel very good that this will get done. And it's not something that's obvious to everybody who doesn't live in that part of the world, but we spend a lot of time in Southeast Asia. So we feel good that that'll get done. But maybe Ajay can comment a little bit more because he goes there a lot often than me.
spk19: Yeah, sure. So YBS is a company I've known now actually for quite some time. They are indeed exactly, as you said, in the backend manufacturing subcontracting business. I know the CEO and the team there, which he runs. So I've been kind of studying them actually for some time, even in my previous life. They have a very good, the uniqueness about them is they have uh exactly the the talent that we would need to localize some of our uh our uh supply supply as in constraints as in a few other mechanical things they're really good at that so then I localize them to you know where I can make them right next door that is when I'll get my cheapest total cost and cost will be reduced. So YBS brings a lot more value than just being a contract manufacturer. They're also going to help us with our ecosystem of various components that go into the battery.
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spk08: Okay, great. No, that's great feedback. And then my follow-up would just be, Raj, I just wanted to clarify something you said earlier, and it kind of relates to Gen 2, Line 2, 3, 4, the execution on those. You mentioned that where previously I think the conversation talked about those being there by or ordered or delivered in Malaysia by the end of next year. you were looking to line those up more with demand. Obviously the pipeline that you have is robust. So I just wanted to clarify, is that lining up, making one all wearables to optimize margins of that line, or is it really just filling the demand funnel needs to fill to have those lines come in?
spk17: Yeah, I mean, again, if that's what we want to make happen, which is pull the trigger and get them all out next year, if that's what makes most business sense, we will do that. I'm not saying we won't do that. I'm just saying, you know, I'm just in general a more of a supply demand matching kind of guy. So the way I look at it is, We have various customers that are actually qualifying our product in IoT devices. They're qualifying it in smartphones. They're qualifying them in wearables. They're qualifying them in laptops. And when you pull the trigger on a line, you want to make sure you're pulling the trigger on the right line and that produce the right kind of batteries for the right customer. So it's not that... I mean, this is beginning of this year. It's not all absolutely clear to me which one will be the first one, which one will come next and what timeframe it'll come. As you guys know that the demand for batteries in the total time is huge, but we just wanna make sure we build the right one at the right margin, at the right thing that makes money for the company. And that's kind of where I was talking about matching supply and demand, right?
spk08: Okay, great. Thank you for taking my questions.
spk15: And our next question comes from Chip Moore from EF Hutton.
spk09: Thanks for taking the question. I actually wanted to go back to YBS real quickly. You know, I imagine seeing the equipment orders and the recent financing only helped them in their discussions around localized financing and tax incentives and things like that. And based on your commentary around revising CapEx next quarter, it sounds like we should expect something fairly soon, so just curious, anything to bear in mind there? And then my follow-up would be, are you seeing any more interest in similar type of capital lightweight things, or is it too soon for those type of conversations? Thanks.
spk17: Yeah, I didn't hear it fully well, but I think the question was on how are we feeling about YBS financing? And like I said, in my prepared remarks, we talk to them constantly and they're making good progress. It's going through the approval process that they need to go through. They're a public company and it's going like how we thought it would. So no cause for concern on our side. We are in close contact with them. We're just going through the due diligence and we're going through all the right step to make sure it's done right. uh there are other options like that and we thought this was the best one that we should pick now uh and that's about all i want to comment at this point is that we do have what we need for the next four lines with this one once this one gets worked out and uh and i and i still reiterate the comment i made before which is uh there's a lot of interest from customers you know as we begin to scale these batteries where they want a surety of supply there's interest from other parties like like we talked about ybs and so on and we will explore all of them and i also mentioned that we'll be opportunistic about capital markets and we were and we were able to accomplish that so i'm just continuing to execute to what i told you guys i would last quarter perfect okay appreciate it thanks
spk15: There are no further questions at this time. With that, I'd like to turn it over to Raj Taluri for closing remarks.
spk17: Yeah, I really want to take just a couple of minutes to thank you all for joining in and all the great questions. Phenomenal team at Enavix. We've done really well this quarter and a lot of work ahead of us, but we are committed to executing this and really appreciate all the support of our partners and investors to allow us to do what we are trying to do. Thank you.
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